Introduction

Despite its substantial oil reserves, the Kingdom of Saudi Arabia—the world’s largest oil producer—is undertaking major initiatives to curb energy consumption and advance energy efficiency. Among the sectors targeted, the building sector stands out as particularly critical. Buildings consume a substantial share of the country’s energy—nearly half of the electricity used in the Kingdom—making energy efficiency in buildings a key priority for the government (Belaïd and Dubyan, 2021).

A recent study by Kamboj et al. (2024) examined a net-zero pathway for Saudi Arabia’s building sector, focusing on energy efficiency within the circular carbon economy. Their integrated assessment modeling indicates that by 2060, Saudi Arabia’s current economic and population increase will require double the current floor space, suggesting an increase in energy demand and associated emissions in the building sector. This underscores the need for improved energy efficiency. Kamboj et al. (2024) findings argue that extending the air conditioning labeling program in KSA could save more than 80 TWh annually. In parallel, cutting fluorinated gas emissions remains critical for aligning the sector with its net-zero targets. The current context calls for sustained policy support and investment in energy efficiency solutions to achieve a net-zero and sustainable built environment.

Under its Vision 2030 plan, Saudi Arabia has introduced a range of policies and regulatory frameworks to enhance energy efficiency in buildings. These efforts include performance standards, financial incentives, public awareness campaigns (Alsaati et al. 2020; Almulhim, 2022), and investments in energy retrofitting programs. Consequently, recent studies highlight the economic and environmental benefits of the energy-efficiency policies and regulatory frameworks implemented in KSA (Al-Homoud and Krarti, 2021; Krarti and Aldubyan, 2021). For example, Krarti et al. (2017) estimate a 10,000-GWh reduction in electricity use per year with a carbon emission offset of close to 8 million tons per year, with retrofitting existing buildings as a result of energy efficiency programs.

Saudi Arabia’s efforts to enhance energy efficiency are anchored by two key initiatives: the Saudi Energy Efficiency Center (SEEC), established in 2010 to coordinate national strategies and standards, and the National Energy Efficiency Program (NEEP), launched in 2012 to implement and monitor specific policy measures across sectors. Both these initiatives reflect KSA’s commitment to promoting building energy efficiency through regulations, building codes, retrofitting programs, human capacity building, awareness campaigns, and energy audits. For example, SEEC aims to enhance building energy efficiency by improving building design and construction practices, developing regulations, and introducing building codes that mandate specific energy efficiency standards (SEEC, 2023); while NEEP coordinates energy-use reduction efforts across multiple energy-intensive sectors (e.g., industry, construction, and transport) through collaborative initiatives involving various government authorities, institutions, and the private sector (Ministry of Energy, 2023). These and other building energy efficiency initiatives have generally focused on four emphasis areas as presented in Fig. 1.

Fig. 1: Saudi Arabia’s efforts to rationalize energy use in buildings.
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Source: Authors’ design.

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Despite KSA’s energy-efficiency commitments and government prioritization, demand for energy use in buildings is expected to rise sharply, driven by population growth, economic expansion, and accelerating urbanization.

In line with this, Al-Tamimi (2017) argues that although KSA has seen significant progress in energy efficiency and conservation policies over the past decade, there is still room for adopting more advanced energy-efficient technologies in the building sector. While there is a growing number of studies providing a comprehensive view of the efforts and progress in enhancing energy efficiency in KSA (Krarti et al. 2017; Almasri et al. 2023), there are no studies that examine how current energy-efficiency policy approaches could be enhanced to drive optimal efficient investments and address behavioral aspects of energy use to advance KSA’s energy efficiency commitments (Fowlie and Meeks, 2021; Linares and Xavier Labandeira, 2010).

This study fills a critical gap in the literature by asking: How can KSA’s current energy efficiency policies be restructured to more effectively tackle persistent challenges—including the energy efficiency gap, the paradox of under adoption, rebound effects, and shortfalls in realized energy savings?

Addressing this question is important given KSA’s energy efficiency priorities because, without a holistic approach that considers the interaction between behavioral versus non-behavioral barriers as well as market versus non-market forces, KSA may find it challenging to achieve its energy efficiency goals and ensure sustainable energy consumption patterns (Belaïd, 2016, 2017, 2025; Belaïd et al. 2020). Based on a conceptual microeconomic theoretical framework (as depicted in Fig. 2) and a comprehensive literature review drawing lessons from other countries, this study develops evidence-based and theory-backed policy actions for improving KSA’s energy efficiency policies in terms of design and implementation. Based on the proposed theoretical framework, we first discuss distinct factors contributing to the energy efficiency gap, where the actual implemented energy efficiency falls short of theoretical optimal levels. We also explore the energy efficiency paradox and the savings gap, focusing on how these factors mediate the extent to which efficiency upgrades translate into their anticipated benefits.

Fig. 2: Conceptual framework.
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Source: Authors’ design.

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This qualitative study contributes to the literature by applying key economic principles—such as underinvestment in cost-effective technologies and rebound effects—to the distinctive policy context of rationalizing energy use in KSA’s building sector. The study closes the literature gap by examining challenges related to (1) behavioral barriers to energy efficiency investments, lack of information, and market failures; (2) upfront costs and insufficient financing options; and (3) rigorous enforcement, continuous technological improvement, and accurate verification, to achieve KSA’s energy efficiency policy goals. The study’s findings are relevant to policymakers, building owners and facility managers, and other stakeholders interested in promoting KSA’s building energy efficiency to mitigate climate change and reduce carbon emissions.

The subsequent sections of the paper are structured as follows. Section “Theoretical and conceptual framework” provides the theoretical underpinning of the analysis. Section “Using an evidence-based approach to inform KSA’s energy conservation commitments” discusses energy efficiency investment barriers, focusing on the costs and benefits of energy efficiency measures, and a summary of policy approaches from different countries. Section “Informing KSA’s energy efficiency commitments using theory-driven insights” discusses the theory-based insights for KSA’s energy efficiency policies. Section “Additional considerations for KSA’s energy policymakers” analyzes the effectiveness of KSA’s policy mechanisms in promoting energy efficiency in buildings and provides some recommendations. Finally, the section “Conclusion” distills the main findings, outlines targeted policy proposals, and identifies avenues for further inquiry.

Theoretical and conceptual framework

This qualitative study employs existing microeconomic principles to examine energy efficiency adoption opportunities and challenges in Saudi Arabia’s building sector. More precisely, to elucidate the underutilization of energy-efficient technologies despite their apparent benefits and guide effective policy development.

This framework includes the energy efficiency paradox, the rebound effect, and behavioral economics insights (see Fig. 2). The core assumption is that economic agents, such as building owners and occupants, make rational decisions to maximize utility or profit. However, this rationality is often bounded by cognitive limitations, information asymmetry, and other behavioral factors (Conlisk, 1996; Jones, 1999; Dyner and Franco, 2004; Giampietro and Mayumi, 2018).

Microeconomic theory provides the foundation for understanding energy efficiency investment decisions (Jaffe and Stavins, 1994; Sun et al. 2021; Mohsin et al. 2023). It posits that rational actors should invest in energy-efficient solutions when the benefits exceed costs. In Saudi Arabia’s building sector context, this theory assumes that building owners and developers would naturally gravitate towards energy-efficient solutions if they were economically advantageous. However, as Gillingham et al. (2009) point out, practical decision-making often deviates from this ideal due to market distortions and behavioral barriers. In the KSA context, these barriers might include low energy prices that reduce the apparent economic benefits of efficiency investments and behavioral biases regarding energy efficiency’s economic and environmental value (Alrashed and Asif, 2014).

The energy efficiency paradox, as described by Hirst and Brown (1990), further complicates this scenario. Despite clear economic benefits, the energy-efficient technology uptake is often suboptimal. Allcott and Greenstone (2012) attribute this to factors such as information asymmetry, split incentives, and high upfront costs. This paradox is particularly evident in many contexts, including Saudi Arabia. Belaïd and Aldubyan (2021) note that despite the country’s harsh climate necessitating high energy demand for cooling, the untapped energy reduction from adopting energy-efficient building technologies remains high. This paradox might be exacerbated by a lack of awareness about energy-efficient technologies among builders, facilities managers, and building occupants, along with misaligned cost-benefit responsibilities in leased properties.

The rebound effect, as theorized by Khazzoom (1980) and elaborated by Sorrell et al. (2009), suggests that efficiency improvements might result in higher overall energy use. Gillingham et al. (2016) emphasize the importance of this effect in designing policies that ensure efficiency gains translate into actual energy use reductions. In KSA, where energy demand for air conditioning is high due to the arid climate, more efficient cooling systems might lead to increased usage, mainly for low-income households, potentially offsetting some of the energy savings (Al-Saggaf et al. 2020). Accordingly, understanding and accounting for this effect is crucial for effective energy efficiency policy design.

Moreover, behavioral economics offers additional insights into non-rational decision-making regarding energy efficiency. Kahneman and Tversky’s (2013) prospect theory explains why individuals might undervalue future savings from energy efficiency investments, preferring immediate gains over long-term benefits. This could be particularly relevant in Saudi Arabia's buildings’ energy use, where historically low energy prices (Gasim et al. 2023) may have fostered a culture of energy profligacy (Alrashed and Asif, 2014). Samuelson and Zeckhauser’s (1988) concept of status quo bias elucidates preferences for existing technologies over new, potentially more efficient options. Contrary to theoretical economic assumptions, real-world decisions frequently involve a status quo option—choosing inaction or sticking with existing or prior choices. Individuals tend to stick with this default, even when better alternatives exist. This might manifest as resistance to adopting building renovations or new technologies that deviate from traditional practices and usual habits.

Furthermore, institutional perspectives shed light on how regulatory structures, cultural norms, and governance frameworks can either facilitate or hinder energy efficiency investments. This viewpoint suggests that the energy efficiency paradox is not merely a result of bounded rationality but can also be exacerbated by insufficient enforcement of building codes and limited policy coherence among different governmental and industrial bodies (Gillingham et al. 2009). In specific contexts, overlapping authorities and fragmented regulations may create uncertainty for developers and investors, thereby dissuading them from embracing innovative technologies.

Additionally, transaction cost economics provides a lens to explore the coordination challenges among stakeholders in constructing, owning, and occupying buildings. High transaction costs in gathering information, negotiating contracts, and monitoring the performance of energy-efficient installations may reduce the perceived net benefits of adopting efficiency measures (Williamson, 1979). For example, building owners in Saudi Arabia may find it difficult to ascertain the long-term returns on insulation upgrades or high-efficiency air conditioning systems, ultimately perpetuating the status quo bias.

In synthesizing these perspectives, the policy framework suggested in this article explores how current energy efficiency policies in Saudi Arabia address these challenges. Varone and Aebischer (2001) emphasize the relevance of policy design and implementation effectiveness in overcoming adoption barriers and incentivizing energy efficiency. Bertoldi and Mosconi (2020) estimated that, in the absence of energy efficiency policies, Europe’s energy use in 2013 would have been 12% higher. This paper’s proposed framework critically examines Saudi Arabia’s existing strategies, such as the Saudi Energy building energy codes, and behavioral change information campaigns. It discusses their effectiveness in light of the above theoretical concepts.

The analysis provides a preliminary basis for analyzing existing policies and proposing improvements in the Saudi building sector. By combining these theories, this analysis offers an initial understanding of energy efficiency challenges and opportunities specific to the Saudi context. It ensures that the study not only identifies barriers but also provides actionable recommendations for enhancing energy efficiency practices in the Kingdom, considering its unique economic, cultural, and climatic conditions (Alrashed and Asif, 2014).

Using an evidence-based approach to inform KSA’s energy conservation commitments

In this section, we provide a comprehensive overview of previous research that examine the benefits of energy efficiency investments and summarize studies that highlight barriers to such investments. We also discuss energy policy approaches using case studies from different countries. Insights from other countries’ experiences and findings from previous studies are used to provide evidence-based recommendations for improving KSA’s energy efficiency policy approach.

Energy efficiency benefits and investment barriers

Energy efficiency offers a range of benefits at both the individual and societal levels. A key advantage of improving energy efficiency in buildings lies in its capacity to lower greenhouse gas emissions. As previously noted, buildings account for a substantial share of global energy use and CO2 emissions. Enhancing their energy performance can significantly reduce consumption and associated emissions, thereby supporting broader efforts to mitigate climate impacts (Belaïd and Flambard, 2023, 2024).

These are broader environmental benefits beyond the decision-maker making the efficiency investments. Since energy use by buildings accounts for a significant share of GHG emissions, any reduction in building energy use will contribute to achieving climate change goals.

An additional advantage of improving energy efficiency in buildings is the reduction in energy-related expenditures. Efficiency benefits the decision-maker in the form of energy savings or avoided costs. Efficiency reduces electricity demand and energy losses, contributing to direct energy bill savings (OEERE, 2019). Energy-efficient buildings can also save money on maintenance costs over time. This can lead to substantial reductions in energy expenses for both building owners and occupants, greater affordability, as well as reduced demand for energy and associated carbon emissions. For example, adopting energy-efficient appliances, lighting, and building materials can lower energy bills and reduce operating costs for households and businesses. This is especially critical for low-income households and businesses that may face financial strain from high energy costs (Belaïd, 2018; Belaïd 2022a, b).

Homeowners can also benefit from efficiency improvements through increased property values. In the EU context, Hyland et al. (2013) show that energy efficiency improvements positively impact home values and rental prices. In a similar study, Fuerst et al. (2016) reported that residential properties with certified high-energy performance commanded price premiums, whereas those with poor ratings sold at a discount. In addition, advancing energy efficiency can stimulate job creation and foster economic development in sectors linked to efficiency technologies and services. Enhancing energy efficiency in buildings necessitates the deployment of advanced systems and materials, generating employment across the manufacturing, installation, and maintenance sectors. Retrofitting existing structures further stimulates demand for renovation and upgrading services, thereby creating labor opportunities for local contractors and skilled trades, and contributing to the development of a specialized energy efficiency workforce.

Moreover, lowering energy consumption using efficient measures can strengthen energy security by decreasing reliance on imported energy and mitigating exposure to volatile energy prices.

Nations will benefit from stable energy prices, particularly when faced with fuel supply shortages caused by geopolitical conflicts (Linares and Labandeira, 2010). Implementing energy-efficient solutions and strategies can bolster the reliability and resiliency of energy systems, making them less susceptible to outages and other disruptions. For electric utility systems, energy efficiency reduces the need to invest in new-generation, distribution, and transmission capacity.

Beyond the aforementioned benefits, improving energy efficiency in buildings can significantly enhance indoor environmental quality, with direct implications for comfort, health, and overall well-being (Nadel, 2019). Energy-efficient buildings often feature superior ventilation, optimized lighting, and stable thermal conditions, all of which contribute to healthier living and working environments. These improvements have been linked to positive health outcomes, greater occupant productivity, and elevated comfort. By minimizing air leakage, enhancing insulation, and optimizing thermal systems, energy-efficient buildings can sustain more stable indoor temperatures and limit drafts, thereby improving air quality and reducing excess moisture. This can help prevent mold growth and other health hazards (U.S. EPA, 2022; Perry, 2019; Perry et al. 2019; Fikru, 2021). Efficiency improvements can also reduce noise levels for ideal working and living spaces. A recent analysis argued that enhanced indoor air quality and ventilation can result in productivity gains of 8–11% (World Green Building Council, 2022). Fig. 3 summarizes the different benefits of adopting energy-efficiency improvements in buildings.

Fig. 3: Benefits of building energy efficiency.
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Source: Authors’ design.

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Despite its well-documented advantages, the uptake of energy efficiency measures in buildings frequently falls short of what economic rationality would predict. Households and firms often underinvest in energy-saving upgrades, even when long-term returns are favorable. This gap stems from a variety of interrelated barriers: concerns over high upfront costs, limited awareness of potential benefits, mistrust in the reliability or performance of energy-efficient technologies, investment uncertainty and irreversibility, and competing financial priorities—such as debt repayment or retirement planning (Gillingham et al. 2009; Linares and Labandeira, 2010). Among these, the initial capital outlay is consistently identified as a primary constraint, especially for low-income households and small businesses (Fowlie et al. 2018).

For instance, the initial price of purchasing energy-efficient devices or a heat pump and upgrading to a high-efficiency HVAC or upgrading insulation in buildings can be substantial, which may deter many consumers from investing in energy efficiency (Sorrell et al. 2006). Green financing such as through low-interest rates has a role in addressing barriers related to the lack of sufficient resources (Lee et al. 2023; Yu et al. 2022).

A second barrier to adoption lies in skepticism regarding the quality and performance of energy-efficient technologies. As noted by Bakaloglou and Belaïd (2022), individuals may be reluctant to invest in upgrades without credible evidence that the anticipated energy savings will materialize. This perceived risk can delay or deter action, particularly in the absence of trusted verification mechanisms. A third set of obstacles stems from regulatory and institutional constraints. Outdated building codes, complex permitting processes, and fragmented governance structures can impose additional costs or procedural hurdles, limiting the feasibility of adopting energy-efficient measures (Sorrell et al. 2006). Moreover, the absence of targeted incentives or supportive programs from governments and utilities further weakens the investment case, especially in contexts where upfront costs remain high and payback periods are uncertain (Economidou et al. 2020).

Market failures—particularly information asymmetries and principal–agent problems—represent additional, well-documented impediments to energy efficiency investments (Gillingham et al. 2012). Among these, principal–agent conflicts, often referred to as “split incentives,” are especially salient. These arise when the party responsible for making the investment does not directly benefit from the resulting energy savings. Classic cases include landlord–tenant and builder–buyer relationships, where investment decisions made by one party (the agent) do not align with the cost–benefit interests of the other (the principal). In rental housing, for instance, landlords may have little incentive to finance efficiency improvements if tenants are responsible for utility payments, leading to persistent underinvestment despite potential mutual gains.

Another major market failure extensively addressed in the economics literature concerns the absence, incompleteness, or asymmetry of information. Two conceptual models help clarify this barrier. In the first, households and firms simply overlook energy-saving opportunities—for example, a homeowner may be unaware of inadequate insulation and the financial benefits of upgrading it. The second model parallels Akerlof’s “market for lemons” (Akerlof, 1970), wherein buyers recognize that buildings vary in energy performance, but cannot easily verify these differences. The high cost of acquiring such information leads to a breakdown in price signals: buyers are reluctant to pay a premium for efficient properties, discouraging sellers from investing in upgrades and ultimately driving high-quality options out of the market (Gillingham et al. 2012).

To address these efficiency investment barriers, KSA can consider policies that align the advantages and costs of energy efficiency to the decision-maker (Fowlie et al. 2018). This will require a multi-dimensional approach involving technology, financial incentives (e.g., green financing), as well as information provision. First, technology interventions, such as developing low-cost energy-efficient technologies, can also help reduce the upfront costs of energy-efficient upgrades (Sorrell et al. 2006). Related to this, building standards and codes can be systematically and periodically updated to reflect the latest technological advances and best practices (e.g., gradually raising minimum efficiency requirements for HVAC systems, windows, etc.). Second, financial incentives, such as grants, low-interest loans, and subsidies, can help offset the high upfront costs associated with energy-efficient upgrades as well as address split incentives (Gillingham et al. 2012). Third, public awareness campaigns and educational programs can help promote energy efficiency’s benefits and provide information on how to implement it effectively (Anderson and Newell, 2004; Schultz et al. 2008; Ayres et al. 2013). Such a multi-faceted approach can empower decision-makers to pursue energy efficiency upgrades, yielding financial savings, enhanced indoor conditions, and lower greenhouse gas emissions.

Lessons from other countries’ policy approaches

Globally, two principal policy frameworks are employed to enhance energy efficiency, capture its associated benefits, and address persistent barriers. The first—commonly referred to as “carrot” measures—relies on financial or informational incentives to encourage voluntary adoption of energy-saving technologies. The second—“stick” measures—encompasses regulatory mandates that impose minimum performance standards or penalties for non-compliance. Most national strategies combine elements of both.

The Netherlands provides a clear example of this integrated approach. According to the American Council for an Energy-Efficient Economy (ACEEE, 2023), it ranks first globally in building efficiency, a position attributed to its calibrated use of both incentive-based and regulatory instruments. For instance, Dutch policy mandates building upgrades through insulation standards and local-level regulations, with fines imposed for non-compliance. Concurrently, the government offers a suite of incentives—subsidies, preferential loans, and tailored informational resources—targeted to distinct stakeholder groups, including homeowners, housing associations, and corporations. On the supply side, incentives also support innovation in the construction sector, particularly in areas such as digitalization and circular design systems.

Another example is the United States, which has recently adopted Building Performance Standards (BPS) in at least nine states. The BPS are regulations that require existing buildings to meet a minimum performance standard via renovations (e.g., energy use per square foot, GHG reduction, etc.). The standard first identifies building types to be regulated and then sets the metrics for the standard. Building owners are required to comply by a specific date (e.g., 5 years from policy implementation). The BPS varies by location and building type, and it is typically applied to large commercial and multifamily buildings. Some financial incentives are available from the city, state, and federal levels to support building owners in their compliance with the established standards (State and Local Building Performance Standards, 2022).

A similar policy approach is the Minimum Energy Performance Standards (MEPS) in the EU (Vavrek and Chovancová, 2020). While the overall objective of MEPS is the same as the BPS in the United States (that is, renovate existing buildings), MEPS prioritizes the worst-performing buildings (e.g., those that use the highest energy per square foot) and applies to all buildings (e.g., residential and non-residential). The MEPS also includes a labeling and rating requirement for buildings to close information asymmetry gaps. These policy approaches have seen substantial successes in improving the energy performance of existing building stocks.

The energy performance ratings mechanism in the EU has experienced some successes in breaking information asymmetry barriers. Such ratings have also contributed to incorporating and valuing energy efficiency benefits into property values. In Ireland, homes with energy efficiency improvements command a higher sale and rental value (Hyland et al. 2013), while in Wales, houses with an A/B energy efficiency performance rating command ~13% higher prices (Fuerst et al. 2016). Tools and instruments that make the energy performance of buildings more visible, such as transparent energy ratings, do a better job of informing markets and breaking the information asymmetry barrier.

Policymakers in KSA can study successful energy efficiency programs from other countries to identify best practices that could be adapted to their own country.Footnote 1 They can look at the program’s structure, goals, implementation, and outcomes to see what worked well and how it could be applied in the KSA context. Learning from other countries’ experiences can also help proactively identify potential challenges and barriers to implementation. For example, energy policymakers can examine the extent of challenges and barriers coming from political, economic, institutional, and social factors that influenced the success or failure of a given program and use this information to anticipate and address similar challenges in KSA.

These country case studies, along with evidence presented from the literature on efficiency investment barriers, could inform KSA’s commitments targeting building energy efficiency. By adopting a multi-dimensional approach (e.g., technology, financial incentives, and information provision) and balancing both incentives (carrots) and regulations (sticks), KSA can effectively enhance its energy efficiency landscape, encouraging optimal investments and ensuring sustainable development in line with its energy efficiency commitments.

Informing KSA’s energy efficiency commitments using theory-driven insights

According to microeconomic theory, energy consumers (e.g., households, businesses, etc.) derive utility from energy services produced using electric power rather than from power itself (Gillingham et al. 2009). Power or electricity is simply an input used to generate services like cooling, lighting, and motion. For example, Hunt and Ryan (2015) argue that energy is a derived demand because power is not needed for its own sake but for producing services. Consequently, energy consumers can be viewed as generating energy services by combining kilowatts (kW) of power with energy-converting technologies like heating, ventilation, and air conditioning (HVAC) systems to produce a comfortable living space (Fikru et al. 2018).

Within this context, energy efficiency investment refers to the allocation of resources to reduce the use of power in generating a given amount of energy services. These investments can take various forms, such as upgrading building insulation, installing efficient HVAC and lighting systems, and integrating energy management solutions to optimize energy demand (Belaïd, 2024). Energy efficiency investments reduce power consumption, and this is referred to as energy savings by Fowlie and Meeks (2021). Consumers are willing to invest in efficiency improvements when the anticipated gains outweigh the associated costs. (e.g., initial costs, or any additional maintenance costs).

According to microeconomic theory, building owners have multiple decisions: (1) decide the level of energy efficiency to invest in or purchase (e.g., buy an A or B-rated HVAC; choose the specific energy performance of an energy-converting technology), (2) determine the desired level of energy services (e.g., comfort level, lighting levels, etc.), and (3) determine levels of energy inputs required (e.g., kilowatt hour (kWh) consumption per period).

The decision is made in two stages (see Appendix A for an illustration), where in the first stage, efficiency and energy input levels are determined for any given level of energy services (Fikru et al. 2018; Sanstad, 2011). This first stage decision is made by minimizing an expenditure function given the technical relationship between energy inputs and energy services. This first stage decision indicates that building owners who make efficiency decisions are conscious of their efficiency expenditures, and they will choose the level of efficiency (e.g., efficiency rating) that minimizes their overall costs for a given level of energy service. The price of electricity and the cost of energy-converting technologies are key parameters that affect decision-making.

In the second stage, decision-makers decide the level of energy services by maximizing a utility function (e.g., comfort level in living space) subject to budget constraints. While the first stage presents decision-makers as ‘producers of energy services’ making an optimal production decision by selecting their inputs (e.g., electricity and technology), the second stage views decision-makers as consumers of energy services that derive utility from their consumption decisions (Fikru et al. 2018). Policymakers need to consider this producer–consumer view of the same decision-maker to devise incentives that align with the producer–consumer objective. For example, financial incentives (e.g., low-interest loans) can be used to reduce building owners’ upfront cost of purchasing advanced energy-efficient technology, while adjusting electricity prices to reflect the true cost of energy consumption can incentivize owners to reduce energy input levels, change energy use patterns and optimize efficiency (Zhang et al. 2014). Efficiency and performance standards can also help improve the energy intensity of high-energy-consuming equipment and appliances.

Despite the well-documented benefits of energy efficiency, the adoption of energy efficiency and related investment rates have been slower than expected (energy efficiency gap). For example, Khan et al. (2024) show that building energy efficiency in KSA remains lower compared to countries in the European Union due to outdated technologies, insufficient building design, inconsistent enforcement of building codes, and extreme climatic conditions (e.g., high temperature). Furthermore, the low electricity prices create disincentives for the private sector to make prompt energy efficiency upgrades. These barriers need to be addressed through the dual producer–consumer perspective by incentivizing the production and consumption of higher levels of energy services via both advanced energy-efficient technologies and the use of lower energy power input.

To facilitate this outcome, SEEC implemented stricter standards for new construction, including requirements for insulation, lighting, and HVAC systems (SEEC, 2023). It has also promoted the renovation and retrofitting of existing buildings through initiatives such as the High-Efficient Air Conditioning Program, which targets upgrades to building envelopes, climate control systems, lighting, and related equipment to curb energy use.

Related to this, minimum energy performance standards of split air conditioning products were raised by 57% to reduce cooling energy load, while appliance efficiency standards contributed to lower energy use (e.g., 60% reduction in washing machine energy use, 22% decline in energy use of refrigerators and freezers, 80% improvement in lighting efficiency, etc.)Footnote 2. Such efforts (e.g., #1 and #4 in Fig. 1) should continue to be implemented and standards consistently enforced and strengthened across multiple sectors to contribute to a more sustainable and environmentally friendly energy system.

Moreover, despite the expected reduction in total energy use due to efficiency standards, evidence shows that total energy use increases (instead of declining) post-efficiency investment (energy paradox), which cuts into the expected energy savings of efficiency investments. These contexts are important for KSA’s policymakers to consider when designing energy-efficiency frameworks.

Energy efficiency paradox and energy efficiency gap

The energy efficiency paradox describes the recurring observation that despite the availability of cost-effective technologies and measures, energy consumption frequently fails to decline—and may even rise—following efficiency improvements. This outcome is paradoxical because energy-efficient technologies and practices are expected to decrease overall energy use and reduce energy expenditures.

The energy paradox is attributed to various economic as well as behavioral reasons. One common energy paradox observed in the academic literature is the energy rebound effect. From the economic point of view, the rebound effect implies that efficiency improvements lead to lower average effective energy costs, leading to increased energy consumption. Additionally, from the behavioral point of view, the adoption of energy-efficient technologies may create a sense of moral licensing, where people feel that they can increase energy consumption because they are doing their part by using energy-efficient technologies. In other words, consumers often increase the intensity of use of energy-consuming technologies following efficiency upgrades, which can partially offset the anticipated energy savings.

The energy efficiency paradox focuses on the energy use patterns before and after adopting efficiency measures. Several pieces of empirical research show the presence of a rebound effect and measure its extent (Belaïd et al. 2018, 2020; Dimitropoulos, 2007).

For instance, based on a sample of the US residential sector, Orea et al. (2015) estimate rebound effects between 56% and 80%. In the UK, Chitnis et al. (2013) report rebound effects from household energy efficiency improvements ranging from 5% to 15%. A subsequent study by Chitnis et al. (2014) finds that these effects are more pronounced among low-income households, where improvements are often subsidized. In the Spanish context, Cansino et al. (2022) estimate rebound effects between 10% and 50%. Despite these findings, Gillingham et al. (2013) maintain that energy efficiency policies—such as appliance standards—can still deliver substantial net energy savings, even when rebound effects are present. Collectively, this body of evidence underscores the need for an integrated policy approach that addresses not only the technical dimensions of efficiency but also the social, economic, and behavioral dynamics shaping energy use (Dunlop, 2019). See Appendix B for additional discussions on the rebound effect.

Another explanation for the limited uptake of energy efficiency improvements is the so-called energy efficiency gap—the discrepancy between the economically optimal level of energy efficiency and what is actually achieved in practice (Jaffe and Stavins, 1994). That is the gap between technically feasible efficiency improvements and the level of efficiency that ends up being implemented. Thus, it has to do with the type of efficiency improvement being installed, not being the most optimal one. The energy efficiency gap occurs due to market failure problems and market, behavioral, and institutional barriers (Gerarden et al. 2015, 2017). Allcott and Greenstone (2012) explain the energy efficiency gap using market failure arguments, behavioral anomalies, and model/measurement errors. For example, consumers may lack information about energy-efficient technologies (information asymmetry) or may not fully understand the benefits of energy efficiency. Similarly, there may be split incentives (market barriers) where energy efficiency benefits and improvements are split between the buyer and seller, making it difficult to justify the investment. Additionally, institutional barriers, such as regulations or policies, may create disincentives for energy efficiency.

While some studies shed light on a substantial energy-efficiency gap (Gillingham and Palmer, 2014), others find that the gap could sometimes be overstated (Stadelmann, 2017). Several other studies examine determinants of the energy efficiency gap to understand why energy decision-makers would not adopt or implement the most energy-efficient approach. For example, Bakaloglou and Belaïd (2022) highlight the role of uncertainty regarding future energy prices and the quality of retrofit technologies in preventing energy efficiency investments.

The energy efficiency paradox and energy efficiency gap are theoretically and conceptually different empirical phenomena that require a deeper investigation before instituting policies to advance energy efficiency investments at the micro or macro levels. While the energy paradox is a comparison of total energy use pre- and post-efficiency improvements, the energy efficiency gap is a comparison across different levels or extents of energy efficiency improvements with what is technically optimal or best. Making this distinction is important for KSA’s energy efficiency strategies. To close the energy efficiency gap, KSA’s policies should include measures to improve access to information, reduce financial burdens through subsidies and green financing (e.g. #3 in Fig. 1), and promote consistent and updated regulatory frameworks across multiple sectors. Addressing the energy paradox in KSA would require supporting behavioral changes toward energy-saving practices, including awareness programs, incorporating targeted mechanisms to mitigate the rebound effect via continuous monitoring and evaluation of energy use patterns post-upgrade, and implementing complementary measures that discourage excessive energy consumption (e.g., smart thermostats, digital electricity monitoring) (Allen and Janda, 2006). Related to this, regular energy audits also have a role in identifying energy efficiency opportunities so that building owners can make informed decisions about energy-saving measures, reducing energy consumption, and lowering energy bills (SEEC, 2023).

Energy savings gaps

When rebound effects exist and are strong, then technical forecasts regarding energy savings from efficiency upgrades will be overestimated (Fowlie and Meeks, 2021). As a result, technical models need to some extent to account for the human and behavioral aspects of energy usage so as not to overstate savings. For instance, the study by Fikru (2019) suggests that engineering estimates of energy savings, mostly based on techno-economic models, may not always be 100% accurate. In some scenarios, actual energy savings may be higher but more variable, and this occurs because technical models often fail to fully account for shifts in household energy consumption habits post-efficiency improvements and some aspects of unpredictable weather changes. Techno-economic models rely on technical parameters such as house size and age, and not on any induced behavioral changes.

There are also several other reasons (besides the rebound effect) why engineering models may end up overestimating energy savings. One reason is assumptions about the building being uniformly heated or cooled throughout a given period. The other most prevalent reason is human behavior, which is assumed to be constant in engineering models (e.g., households may adjust the thermostat setting from their default levels or forget to switch off lights). Finally, households may not maintain energy technologies as often as they should, and this reduces the performance of these technologies to yield the predicted savings. However, this is not to say that engineering models are useless. Engineering models are essential, and they provide valuable insights into the potential energy savings of a variety of energy efficiency improvements. However, such estimates should be interpreted together with an analysis of human and behavioral factors.

In the Saudi Arabian context, Belaïd and Mikayilov (2024) recently examined the direct rebound effect in residential electricity use and proposed strategies to reduce its influence. Using time-series modeling over 31 years (1990–2021) across four regions, they found the rebound effect ranged from 41% to 71%. Since the 2016 energy price reform, residential power consumption rebounded by 39.02 TWh, resulting in 28.13 Mt CO2 equivalent emissions (2016–2021). The Southern region exhibited the highest rebound, which may be attributed to its relatively lower income levels and per capita energy consumption compared to other regions. These findings offer important insights for mitigating rebound effects in Saudi Arabia’s residential electricity sector. They align with the results of Massié and Belaïd (2024), who estimated the direct rebound effect in the EU residential sector at 18% in the short run and 43% in the long run. Together, these studies provide valuable guidance for policymakers seeking to mitigate rebound effects and enhance the effectiveness of energy efficiency policies across varying economic contexts.

To address the energy savings gap, energy-efficiency policies in KSA should focus on rigorous and consistent enforcement of energy efficiency standards, incentivizing continuous improvement in technology, accurate measurement/verification of energy savings, and incorporating human factors (see Fig. 4, the first column for a summary of theory-based policy recommendations for KSA).

Fig. 4: Summary of policy recommendations.
figure 4

Source: Authors’ design.

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The successful implementation and enforcement of such efforts requires a well-trained workforce to design, install, maintain, and audit energy-efficient technologies and systems. Investing in education and training programs will ensure that there is a pool of experts who can support the transition to more energy-efficient practices. To advance these objectives, SEEC has established specialized centers of excellence in collaboration with leading Saudi universities, aimed at cultivating technical expertise in the design and construction of energy-efficient buildings (SEEC, 2023). In parallel, it has introduced a suite of targeted training programs to strengthen the skills of practitioners across the building sector (e.g., see #2 in Fig. 1). SEEC has also taken deliberate steps to engage building owners and occupants through sustained public outreach. Since 2004, more than 25 awareness campaigns have been implemented, employing both traditional media and digital platforms to promote the benefits of energy efficiency (SEEC, 2023).

Additional considerations for KSA’s energy policymakers

The economic principles covered in this section suggest that energy-related policies create clear signals, but instituting them is insufficient. Before instituting policy intervention, one must do due diligence to ensure the proper identification of the nature of the economic problem as well as accurate measurements of the extent of market failure or other issues intended to be addressed by policy instruments.

In addition, incentivizing policy needs to meet goals cost-effectively to avoid wasting public funds. Related to this, enforcement mechanisms should not be burdensome and costly. Second, safeguards need to be built into the policy design to account for unintended consequences and address redistribution concerns. Third, a one-size-fits-all approach may not be cost-effective, so policies ought to consider specific scenarios and the characteristics of decision-makers (e.g., residential versus non-residential buildings, different ownership structures of residential properties, etc.) by designing different incentive mechanisms for different sectors and building types. Specific policy changes could also be initiated at the local or bottom level to address local needs and local concerns. Fourth, making sustainable changes means thinking through to make policy instruments have a lasting impact by altering rather than replacing market forces. Finally, we also recommend that policymakers identify (if any) and examine the extent of the energy efficiency paradox and energy efficiency before designing policy tools to encourage energy efficiency investments. Consulting behavioral approaches and economic models will help inform policy-making. For example, the producer–consumer view of decision-making implies that decision-makers may have multiple objectives when it comes to energy efficiency and that decisions are made in layers or stages that build upon one another.

In this regard, systematic data collection and advanced energy modeling (e.g., machine learning algorithms) are critical tools for policymakers and building owners to improve energy efficiency. By identifying inefficiencies (e.g., energy waste or leakage), monitoring energy use, benchmarking performance (e.g., against standards or past performance), predicting maintenance needs, and encouraging behavioral changes (e.g., real-time feedback), data collection can significantly contribute to energy savings and also help policymakers evaluate the effectiveness of existing policies. The gathered data can be used to make targeted improvements (e.g., such as upgrading equipment or sealing leakages), set additional targets, and inform future energy-saving strategies. The third column of Fig. 4 summarizes the additional policy recommendations presented in this sub-section.

Recommendations for program development

Having explored the theoretical foundations that guide energy efficiency investments and decision-making, particularly within the Saudi Arabian context, it is imperative to translate these insights into actionable policy frameworks. The dual producer–consumer perspective, the energy efficiency gap, and the energy paradox collectively highlight the necessity for customized, data-driven approaches that can effectively surmount existing obstacles. Here, we present targeted recommendations for program development, emphasizing forward-thinking policies and interventions designed to address both market inefficiencies and behavioral intricacies, thereby substantially enhancing the energy performance of buildings in Saudi Arabia.

To elevate energy efficiency in Saudi Arabia’s policymakers must not only reinforce ongoing initiatives but also conceptualize a suite of additional, innovative policies and programs aimed at rectifying market failures and mitigating behavioral anomalies. Attaining buildings decarbonization objectives demands a comprehensive five-step approach: (1) construction and design, (2) integration of renewable energy sources, (3) renovation of existing building stock, (4) incorporation of energy management and smart technologies, and (5) fostering behavioral change (Fig. 5). The advancement of robust policies and regulatory frameworks is crucial to ensure a successful execution of these actions. Employing a combination of incentive-based and regulatory strategies—such as updated building codes and standards, energy performance labeling, energy-efficient mortgages, green leases, and green financing initiatives (e.g., similar to the U.S. Property Assessed Clean Energy Financing Initiative (PACE))—alongside behavioral interventions and innovative financial mechanisms can help overcome barriers to energy efficiency. This multifaceted approach will unlock significant economic and environmental benefits, including cost savings, enhanced energy affordability, and substantial reductions in GHG emissions).

  1. 1.

    Building design and construction: The design and construction of new buildings present a key opportunity to significantly reduce energy demand for heating, cooling, ventilation, and lighting. In Saudi Arabia’s hot and arid climate, cooling constitutes the primary energy load in buildings. As such, embedding principles of sustainable architecture and energy-efficient technologies into new developments is essential for curbing energy use. For instance, building orientation should be optimized to provide maximum shading during summer months while allowing solar gain in winter. The use of high-performance insulation and thermally efficient materials can lower cooling needs and enhance indoor thermal comfort. Incorporating daylighting strategies and energy-efficient lighting systems can further reduce electricity consumption. In addition, reflective roofing materials and light-colored pavement surfaces can limit heat absorption, thereby decreasing the reliance on mechanical cooling systems.

  2. 2.

    Renewable energy integration: The integration of renewable energy presents a practical and robust approach to supplying energy in the built environment. With effective systems for capture and storage, buildings can be sustained by naturally available energy sources—enabling continuous operation, including during periods of low generation, such as nighttime or overcast conditions. Saudi Arabia possesses substantial renewable energy resources, with solar power offering particularly high potential. The country ranks among the top ten globally in daily solar irradiance, measured in kilowatt-hours per square meter (Al-Ghamdi and Alshaibani, 2017). In alignment with Vision 2030, the government has committed to sourcing 50% of its electricity capacity from renewables by the end of the decade, backed by major investments in both solar and wind energy. Integrating these renewable sources into the built environment offers a pathway to reduce reliance on fossil fuels while advancing the decarbonization of buildings. Technologies such as building-integrated photovoltaics and solar thermal systems can supply electricity and hot water, respectively, decreasing demand for conventional energy inputs (Al-Ghamdi and Alshaibani, 2017; Elshurafa et al. 2021). Related to this, energy storage systems (e.g., batteries, flywheels, and thermal energy storage, etc.) are promising technologies for promoting energy efficiency in buildings powered by renewable energy.

  3. 3.

    Renovation of existing buildings: Improving energy performance in the built environment—particularly where building stock turnover is slow—requires focused efforts on retrofitting older structures and replacing inefficient systems. In Saudi Arabia, existing buildings present considerable potential for energy upgrades. Realizing this potential demands a coherent policy framework, innovative renovation models, and accessible financing and implementation mechanisms. Key measures include enhancing insulation, installing high-efficiency lighting and HVAC systems, and integrating building automation technologies to optimize system performance. To support such efforts, SEEC has introduced a range of initiatives, including the High-Efficient Air Conditioning Program, aimed at assisting building owners and operators in adopting these energy-saving improvements.

  4. 4.

    Energy management and smart technologies integration: Monitoring and control systems are integral to reducing energy demand and improving operational efficiency. In the Saudi context, digital technologies hold particular promise for fine-tuning energy use, managing load distribution, and curbing emissions. Automated building systems—such as motion-based controls and adaptive thermostats—allow for precise regulation of HVAC and lighting, limiting unnecessary consumption. At the grid level, smart infrastructure facilitates better coordination of supply and demand, helping utilities mitigate peak load stress and maintain system stability.

  5. 5.

    Behavioral change: Changing occupant behavior is a crucial aspect of achieving energy efficiency in buildings in Saudi Arabia. Behavioral interventions can be used to nudge occupants to use less energy. These interventions include providing feedback and information on energy consumption, offering incentives and rewards for energy-efficient behavior, communicating social norms through signage or other means, and providing educational materials and training to building occupants. Encouraging deliberate user behavior—such as switching off unused lights and appliances, relying on natural ventilation when conditions permit, and maintaining thermostats at efficient setpoints—can yield substantial reductions in energy use.

Fig. 5: Strategies for reducing emissions in the built environment.
figure 5

Source: Authors’ design.

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Conclusions

The building sector is a crucial area of focus in the debate over energy efficiency and conservation. Despite decades of research and policy development, significant challenges remain in achieving optimal levels of energy efficiency in buildings. A central issue in this debate concerns the definition of the economically optimal level of energy efficiency and the means by which it can be attained cost-effectively. In this regard, energy policies are instrumental in unleashing the full potential of efficiency investments.

This study has delved into the economics of energy efficiency in buildings, specifically focusing on the efficiency gap and the energy efficiency paradox to draw lessons for Saudi Arabia. Through a review of existing literature and case studies, the analysis provides valuable insight for energy policymakers in the Kingdom. The analysis has also identified several policy interventions that could help overcome challenges related to energy efficiency in the building sector in Saudi Arabia.

This study calls for a multifaceted approach to energy efficiency, focusing on five key areas: (1) sustainable building design and construction, (2) integration of renewable energy sources, (3) renovation of existing buildings, (4) deployment of smart technologies and energy management systems, and (5) fostering behavioral change among building occupants. Together, these strategies present a roadmap to significantly enhance the energy performance of Saudi Arabia’s building sector while reducing its reliance on fossil fuels.

The insights from this research can help policymakers in Saudi Arabia determine the most effective approaches to address the specific market and behavioral failures that prevent the widespread diffusion of energy efficiency in the building sector. To this end, robust policies such as updated building codes, energy performance labeling, and innovative financial mechanisms, including green leases and energy-efficient mortgages, must be prioritized. Integrating renewable energy systems and advancing smart grid technologies can further support a smooth transition to more sustainable energy use in the building sector.

Yet, ace the challenge of weighing the economic and technical outcomes of energy efficiency policies against competing priorities, such as energy security, energy justice, and job creation. Further research in this vein is therefore essential to better understand the potential for energy efficiency policies to increase economic efficiency. Future research should critically examine the comparative effectiveness of regulatory mandates, incentive structures, and market-based instruments in driving efficiency gains. It should also explore emerging business models and policy mechanisms capable of reshaping energy use in buildings through more targeted and context-specific interventions.