iserith
Magic Wordsmith
I basically agree. It is good to have in reserve as a threat - "ok you can stay awake all night - if you want to take A LEVEL OF EXHAUSTION, MUA HA HA!"
But the effects are so harsh I almost never force it on the pcs. At worst they might need a low DC CON save to avoid it.
This actually came up in my last session. The PCs are on an airship and their goal is to capture a villain hiding out somewhere on the ship before it reaches the next port in 2 days. We broke down the days basically into 4-hour increments, so you had 4 phases in which each PC could do a notable thing to get after your goals plus 2 phases to sleep/long rest. You could opt out of the sleep/long rest phases to gain +2 more "things" you could do, but you took a level of exhaustion if you're the sort of creature that sleeps.
The warforged fighter and the kalashtar cleric (who is a stoner) both decided to forego sleep to try to improve the airship crew's attitude toward the party and try to pick up useful contacts among the quirky cagey passengers. The cleric is the party's "face" and has Psychic Glamour which gives him advantage on Persuasion checks. As a result, he really didn't care about exhaustion since even with exhaustion he'd be making a straight roll to party with the crew all night and beyond. It was pretty awesome.
I kind of lost the point of where I was going with this, but I guess it has something to do with the idea that as long as the players know the risks ahead of time, then it's fair. They can choose whether it's worth the risk or not, based on what they have to offset the potential penalties.