This study investigates the energetics of tropical cyclone intensification using the Available Potential Energy (APE) theory. While the idea is now well accepted that tropical cyclones (TCs) intensify as the result of the conversion into kinetic energy of the APE generated by the release of latent heat extracted from the warm tropical ocean surface, its rigorous theoretical formalization has remained elusive owing to the complexity of constructing a suitable reference state for defining and quantifying APE in a moist atmosphere. Yet the construction of such a reference state is a key fundamental issue, because the magnitude of the APE reservoir and of its temporal evolution, as well as the values of the thermodynamic efficiencies controlling the rate at which diabatic processes generate or destroy APE, depend on its specification. This issue is illustrated in the idealized context of an axisymmetric TC model by comparing the energetics of TC intensification obtained by using two different sorting‐based approaches to compute the reference state defining APE. It is found that the thermodynamic efficiency controlling the APE generation by surface latent heat fluxes is larger when the reference state is constructed using a ‘top‐down’ sorting method, as the APE thus defined absorbs all the CAPE present in the system. However, because a large fraction of the overall CAPE is never released during the TC's lifetime (e.g. in regions dominated by subsidence), there is a better agreement between the production of APE by surface fluxes and its subsequent conversion into kinetic energy when a ‘bottom‐up’ reference state is used. These results suggest that, contrary to what is usually assumed, the reference state in APE theory should be constructed to minimize, rather than maximize, the total APE, so that the introduction of dynamically inert APE is minimized.