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Energy efficiency is also called second-law efficiency because it computes the efficiency of a process taking the second law of thermodynamics into account.

The energy E and exergy B balances of a process are:

and

Efficiency η of the process may be described using the thermodynamic potentials E or B. Efficiency is the fraction of the potential that makes its way into the product.

and

It should be noted that the energy efficiency quoted by appliance makers is the "first-law" thermodynamic efficiency; it only tells how well the particular appliance converts one form of energy, usually electricity, into another, usually heat. It does not tell how the appliance compares to, say, a Carnot heat engine or any other cyclical process.

The second-law efficiency tells us about the quality of energy; it compares the efficiency of a process as compared to a perfect Carnot heat engine operating at the same conditions. For example, instead of using electricity to heat a coil of wire to create heat, one could use the electricity to drive a motor that in turn drives a pump. The pump would move a working fluid in a continuous cycle of compression, heat rejection, expansion, and finally heat absorption. This cycle takes advantage of the very high quality energy more efficiently than a resistive heater.

Also see exergy. An example of a poor use of the energy availability of a chemical fuel, such as methane gas, is to combust it solely for the purpose of heating water. While this has a high "first-law efficiency", it has a low "second-law efficiency", thus one wastes a tremendous amount of high-temperature, high-quality energy to heat the relatively cold water. A combined heat and power system with inherently higher exergy efficiency, would use the fuel to run a heat engine and use low-temperature waste heat for the water heating requirement. The quantity of energy is the same, but it is of higher quality and higher economic value due to the mechanical output of the engine.