I asked a similar question on xda; this is the response I got.
"Device mode is the traditional GPS toggle. GPS is more battery hungry than network location, but more accurate. This is why battery saving is called battery saving, as it uses network location, and compared to GPS it is more battery saving. Because it uses network location it is also less accurate, so it can't be used for navigation. However, to save battery, Google location stuff (Google Now, location history, reporting, etc.) only use network location. In device only mode, there is no network location, so Google location stuff doesn't work. This is why it may appear to be more battery efficient as you don't get the Play Services wakelock. Just imagine what will happen to your battery if every time it wakes your device up it has to wait for a GPS lock. By disabling Google location stuff when network location isn't available Google is doing you and your battery a favor.
Which mode uses less battery? I'd say device, as GPS is only used when an app like maps requests it. As much as Play Services wakelocks have been a non-issue for me, they do wakelock more. It's not directly linked to battery saving, as battery saving itself is indeed more battery saving than device, but unless you disable location services battery saving brings with it those wakelocks which may or may not bother you."