This study employs a sector-coupled energy system model to co-optimise investments in the supply side, demand side, and efficiency improvements. Beginning with a novel validation exercise of 2023, we demonstrate that the model can accurately reproduce the energy mix with an error of less than 5%. This approach incorporates often-neglected energy carriers, such as coal, gas, and nuclear, providing a holistic view of the current energy landscape. The analysis focuses on the impact of energy efficiency measures and building renovations on seasonal peak heating demand in Europe, featuring a pathway study that examines carbon emission targets for 2030, 2040, and 2050, while incorporating a new focus on efficiency improvements and demand-side response for the heating sector. Results indicate that reducing peak heating demand by up to 49% is cost-optimal and can facilitate annual reductions of 0.2 billion tons of greenhouse gas emissions by 2030, exceeding current emissions targets by 10%. Additionally, the findings suggest potential savings of €44.2 billion in distribution grid investments and a 75% decrease in transmission grid congestion. The study highlights that lowering peak demand could alleviate the need for significant investments in renewable energy infrastructure, potentially eliminating the requirement for 600 GW of onshore wind and 872 GW of solar PV capacity. Furthermore, optimising transmission and supply investments could lead to lower electricity prices, improving equity in pricing across European countries and significantly reducing energy bills for households and industries. Overall, the research underscores the critical role of energy efficiency and flexibility measures in achieving Europe’s decarbonisation goals while ensuring affordable energy access.