What’s the ROI on LEDs?

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Light emitting diode (LED) technology has proved to be very energy efficient, but coming up with a real number to represent overall savings requires more than just comparing an upgraded facility’s before and after electric bills. This post will provide some figures to assess the return on investment (ROI) for an LED lighting project by approximating a payback period.

The costs associated with any lighting installation include the equipment cost, for luminaires and other hardware; the cost of labor to install it; and the ongoing charges for electricity usage. It turns out to be a good example of trying to compare apples to oranges, but let’s give it a try anyway. Even a rough estimate of how long it takes for the cumulative gains (electricity bill savings) from an investment in LED lighting to equal the cumulative cost can be useful.

Consider the example we used in an earlier post, the upgrade replacement of 25 traditional lighting fixtures on one 20 amp circuit with an equal number of LED luminaires to produce equivalent light output for the covered area.

Equipment costs. Theses days the variety of LEDs to choose from is staggering, but we can keep our calculations simple by assuming we use “troffer retrofit lamps.” According to R.S. Means’ Building Construction Cost Data, these range in cost from $238 to $510 including lamps, mounting hardware and connections (labor is listed separately). Selecting a midrange offering, let’s say $374 per unit.

Remember, however, that an additional switching device is required to deal with the inrush current of the LED luminaires, as discussed in that earlier post. Depending on the installation, adding surge protection might also be necessary. Let’s assume for this example an additional cost of $50 per luminaire for the required zero-crossing contactor and overvoltage protection devices.

That brings our total equipment cost to $424 per luminaire, or $10,600 overall.

Labor costs. The Means prices listed for electrical installations range from about $20 to $80 for troffer lighting installation, regardless of whether it’s LED or fluorescent, and about $25 to $85 for simple switching devices. Again sticking with the midrange pricing, let us assume $100 in labor for the installation of each LED luminaire and contactor. For our 25-luminaire example, then, the labor cost is $2,500.

Adding labor to the equipment brings the total installed system cost to $13,100.

Electricity costs. This part of the estimate is interesting because electricity prices vary so greatly around the world. The UK energy company OVO offers a convenient comparison of rates from around the world, converted to U.S. dollars per kilowatt hour ($/kWh), based on 2011 data.^[1] Denmark is at the high end, paying $0.41/kWh on average. China and India are at the other extreme with an $0.08/kWh national average rate.

Of course, those are pretty broad strokes. For example, in the U.S. the average rate in 2011 was about $0.12/kWh. According to the U.S. Energy Information Administration, the U.S. average had risen to $0.129/kWh by August 2016, with generally higher rates in the Northeast and Mid-Atlantic states, and generally lower rates in the South.^[2] The outliers, Alaska and Hawaii, at that point were paying about $0.21 and $0.27, respectively.

In a basic calculation for an investment in LED lighting, assuming lower electricity rates gives conservative results. Therefore, let us use the 2011 U.S. average of $0.12/kwh to determine a payback period, realizing that this includes many variables.

The amount of time the lights are on is another factor that affects electricity consumption. For this example, we assume a standard work year of 2080 hours, which is approximately eight hours a day, five days a week. Longer hours would mean a quicker payback.

First, calculate the LED energy use. At 56 watts per luminaire, the 25 luminaires consume 1,400 watts – that’s 1.4 kW – when they are burning.

1.4 kW x 2080 hours x $0.12/kWh = $349.44 cost for electricity per year

Conservatively estimating the energy use for the equivalent 25-fixture system using traditional lighting can be assumed to be anywhere from four times to 10 times greater. Let’s go with a factor of 7, which yields an annual electricity cost of $2,446.08. The annual savings in electricity cost for the LED option would then be $2,096.64.

Calculating payback period

Saving $2,096 a year in electricity cost may not seem like much, compared the $13,100 cost of the example upgrade. If those were the actual hard numbers, it would be a little more than six years before the savings in electricity paid for the installation of the new LED lighting system. But consider these three factors:

• Where electricity is three times more expensive, for example in Denmark and Germany, the payback time is closer to two years – again, based on electricity cost savings alone.
• The expected service life of LED lighting is easily (and again, conservatively) four times longer than traditional lighting sources, which drastically reduces maintenance and repair costs, both in terms of labor and replacement equipment.
• If an older lighting system is slated for replacement anyway, only the “premium” cost of an LED solution compared to a traditional solution should be considered – you’re going to be spending some money either way – and the size of that premium is now small and continues to shrink as LED lighting becomes more widely adopted.

All things considered, LED is a pretty good option, both now and for the future. To learn more, download our white paper “Impact of LED Lighting on Electrical Networks.”

[1] https://www.ovoenergy.com/guides/energy-guides/average-electricity-prices-kwh.html

[2] https://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a