Economics of Energy Efficient Lighting Prepared by ISR – University of Coimbra July 2017

Economics of Lighting Initial cost Operating cost Maintenance cost. For the economic evaluation of different lighting solutions the Life-Cycle Cost (LCC) or Total Cost of Ownership (TCO) should be considered. Total lighting systems costs include: Initial cost Operating cost Maintenance cost.

Economics of Lighting Life-Cycle Cost (LCC) / Total cost of ownership for two types of lamps The initial investment in the LED installation may be higher than a traditional lighting installation, but the LEDs lower energy consumption and maintenance cost may provide a lower total cost over the lifetime of the installation. The same is true for luminaires. When using an energy efficient and optically superior luminaire, higher initial costs are quickly offset by using fewer luminaires. Less luminaires translate to savings in energy consumption and maintenance over the life of the product.

Economics of Lighting LifeCycle Cost (LCC) Initial Cost (IC): e.g. costs for the lighting design, lighting equipment, wiring and control devices, and the labour for the installation of the system. Operating cost (OC): energy Maintenance Costs (MC): e.g. replacement of the burnt out lamps (relamping), cleaning, replacement of other parts (reflectors, lenses, louvers, ballasts, etc.) 𝑳𝑪𝑪=𝑰𝑪+𝑶𝑪+𝑴𝑪 (−𝑭) Energy saving grant (F): If an energy saving grant is given to the project (e.g. €/kWh saved) the value of the grant must be subtracted to the costs.

Economics of Lighting LifeCycle Cost (LCC) Investment / Initial Cost (IC) Data to be collected (for each technology option): Number of luminaires (n) Luminaire price including the light source (CL) Installation costs per luminaire (CI) 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑪𝒐𝒔𝒕 € =𝒏× 𝑪 𝑳 + 𝑪 𝑰

Economics of Lighting LifeCycle Cost (LCC) Operating Cost (OC) Data to be collected (for each technology option): Number of luminaires (n) Power per luminaire including lamp and ballast/driver, in Watt (PL) Electricity cost, €/kWh (CE) Annual operating hours (h) 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 € = 𝒏×𝒉× 𝑷 𝑳 × 𝑪 𝑬 𝟏𝟎𝟎𝟎 Annual operating hours (h)

Economics of Lighting LifeCycle Cost (LCC) Maintenance Cost (MC) Data to be collected (for each technology option): Number of luminaires (n) Lifetime of lamp, in hours (LL) Lifetime of project, in hours (LP) Lamp exchange costs, including lamp and manpower (Cm1) Other maintenance costs (Cm2) 𝒊𝒇 𝑳 𝑳 < 𝑳 𝑷 , 𝑴𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝑪𝒐𝒔𝒕 € =𝒏× 𝑳 𝒑 𝑳 𝑳 × 𝑪 𝒎𝟏 + 𝑪 𝒎𝟐 𝐢𝐟 𝐋 𝐋 ≥ 𝐋 𝐏 , 𝐌𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝑪𝒐𝒔𝒕 € = 𝑪 𝒎𝟐 (since no replacements will be made)

Simple Payback = Difference in Investment Costs ( IC ) Economics of Lighting Simple Payback = Difference in Investment Costs ( IC ) Difference in Annual Savings ( OC+MC ) Simple payback period does not take into account the time value of money, which is a serious drawback since it can lead to wrong decisions in projects with long payback times (>5 years), and/or large discount rates

Economics of Lighting Discounted Payback A variation of payback method that attempts to remove this drawback is called discounted payback period method. If the discount rate is i, the discounted savings of year n are given by: 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑠𝑎𝑣𝑖𝑛𝑔𝑠= 𝐴𝑛𝑛𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑎𝑣𝑖𝑛𝑔𝑠 (1+𝑖) 𝑛 . i is the interest rate or discount rate, which reflects the cost of tying up capital and may also allow for the risk that the payment may not be received in full. The lifecycle savings are calculated by summing the discounted savings over the years. The Discounted Payback period is the number of years for the sum of the discounted savings to be equal or greater than the difference in investment costs, and because of the reduced time value of future savings, is larger than the simple payback period.

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑(𝑦𝑒𝑎𝑟𝑠)= ∆𝐼𝐶 ∆𝑂𝐶+ ∆𝑀𝐶 𝐿 𝑃 ℎ Economics of Lighting Simple Payback 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑(𝑦𝑒𝑎𝑟𝑠)= ∆𝐼𝐶 ∆𝑂𝐶+ ∆𝑀𝐶 𝐿 𝑃 ℎ 𝑳 𝑷 𝒉 gives the projects lifetime in years ∆𝐼𝐶 - difference in Investment Cost ∆𝑂 - difference in anual Operating Cost ∆𝑀𝐶 - difference in Maintenance Costs during the project lifetime

Economics of Lighting LCC calculation Example Replacement of: Halogen Spotlights With: LED Spotlights

Economics of Lighting LCC calculation Lamp characteristics Halogen LED Number of lamps 50 Luminous flux (lm) 1 200 1200 Efficacy (lm/W) 24 100 Power (W) 12 Lifetime (hours) 2 000 50 000 Annual operating hours 3120 Cost (€) 1,20 10,0 Installation Cost (€) 0,10

Economics of Lighting LCC calculation Initial Cost (IC) Calculation Number of luminaires (n) Luminaire price including light source (CL) Installation costs per luminaire (CI): 𝑰𝑪 𝑯𝒂𝒍𝒐 =𝒏× 𝐶 𝐿 + 𝐶 𝐼 =𝟓𝟎× 𝟏,𝟑𝟎+𝟎,𝟏𝟎 =𝟕𝟎 € 𝑰𝑪 𝑳𝒆𝒅 =𝒏× 𝑪 𝑳 + 𝑪 𝑰 =𝟓𝟎× 𝟏𝟎,𝟎𝟎+𝟎,𝟏𝟎 =𝟓𝟎𝟓 €

Economics of Lighting LCC calculation Annual Operating Cost (OC) Number of luminaires (n) Power per luminaire including lamp and ballast/driver, in Watt (PL) Electricity cost, €/kWh (CE) Annual operating hours (h) 𝑶𝑪 𝑯𝒂𝒍𝒐 = 𝒏×𝒉× 𝑷 𝑳 × 𝑪 𝑬 𝟏𝟎𝟎𝟎 = 𝟓𝟎×𝟑𝟏𝟐𝟎×𝟓𝟎×𝟎,𝟏𝟔 𝟏𝟎𝟎𝟎 =𝟏𝟐𝟒𝟖€ 𝑶𝑪 𝑳𝒆𝒅 = 𝒏×𝒉× 𝑷 𝑳 × 𝑪 𝑬 𝟏𝟎𝟎𝟎 = 𝟓𝟎×𝟑𝟏𝟐𝟎×𝟏𝟐×𝟎,𝟏𝟔 𝟏𝟎𝟎𝟎 =𝟐𝟗𝟗,𝟓𝟐€ Annual operating hours (h)

Economics of Lighting LCC calculation Maintenance Cost (MC) Number of luminaires (n) Lifetime of lamp, in hours (LL) Lifetime of project, in hours (LP) Lamp exchange costs, including lamp and work (Cm1) Other maintenance costs (Cm2) – in this example are considered zero 𝑴𝑪 𝑯𝒂𝒍𝒐 =𝒏× 𝑳 𝑷 𝑳 𝑳 × 𝑪 𝒎𝟏 + 𝑪 𝒎𝟐 =𝟓𝟎× 𝟓𝟎𝟎𝟎𝟎 𝟐𝟎𝟎𝟎 ×𝟏,𝟒𝟎+𝟎=𝟏𝟕𝟓𝟎€ 𝑴𝑪 𝑳𝒆𝒅 = 𝑪 𝒎𝟐 =𝟎

Economics of Lighting LCC calculation LifeCycle Cost (LCC) 𝑳𝑪𝑪 𝑯𝒂𝒍𝒐 = 𝑰𝑪 𝑯𝒂𝒍𝒐 + 𝑶𝑪 𝑯𝒂𝒍𝒐 + 𝑴𝑪 𝑯𝒂𝒍𝒐 =𝟕𝟎+𝟏𝟐𝟒𝟖+𝟏𝟕𝟓𝟎 =𝟑𝟎𝟔𝟖€ 𝑳𝑪𝑪 𝑳𝒆𝒅 = 𝑰𝑪 𝑳𝒆𝒅 + 𝑶𝑪 𝑳𝒆𝒅 + 𝑴𝑪 𝑳𝒆𝒅 =𝟓𝟎𝟓+𝟐𝟗𝟗,𝟓𝟐 =𝟖𝟎𝟒,𝟓𝟐€

Economics of Lighting Simple payback calculation 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 𝒚𝒆𝒂𝒓𝒔 = ∆𝐼𝐶 ∆𝑂𝐶+ ∆𝑀𝐶 𝐿 𝑃 ℎ = 𝐼𝐶 𝐿𝑒𝑑 − 𝐼𝐶 𝐻𝑎𝑙𝑜 𝑂𝐶 𝐻𝑎𝑙𝑜 − 𝑂𝐶 𝐿𝑒𝑑 + 𝑀𝐶 𝐻𝑎𝑙𝑜 − 𝑀𝐶 𝐿𝑒𝑑 𝐿 𝑃 ℎ = 505−70 1248−299,52 + 1750 50000 3120 =0,44 𝑦𝑒𝑎𝑟𝑠

Economics of Lighting Simple payback calculation If instead of comparing two technologies for a new installation we were analysing the retrofitting of existing halogen lamps with LED lamps the initial cost for halogen lamps is considered zero. The simple payback period would be slightly larger at just 0.51 years

Economics of Lighting LifeCycle Cost (LCC) Other considerations ― The electric energy for lighting is an internal heat gain in a room. In winter peaking regions (cold areas) it can be utilized for heating, but in other regions and in summer time it will increase the need for cooling energy.

Economics of Lighting Online tools There are online calculation tools that, with varying degrees of complexity, can help in the economic comparison between technology options. Some examples are: http://glamox.com/gsx/investment-analysis-calculator http://hub.currentbyge.com/current-articles/simple-life-cycle-cost-estimator http://www.dialight.com/TCOCalculator/

Economics of Lighting Energy Efficiency Investments Best practice for investment Ring fenced investment budget Retention of a % of savings for more measures Appraisal on whole life cycle basis Retention of a % of savings by relevant department Maximise support from grants and other external sources Energy efficiency investments often have to compete directly against other demands for capital budgets and can often lose out to projects that are seen as having greater priority. Consequently, if an organisation’s energy policy objectives are to be met it is likely that capital budgets will need to be specifically allocated to energy efficiency. Many organisations have also found it effective to retain achieved savings in energy costs to fund further measures, which helps sustain the energy programme and provides continuous improvement in energy performance. Life cycle costing gives the full picture of the value of an energy efficiency project, over its whole life. The energy cost of running most equipment is many times higher than the original purchase price.

Economics of Lighting Energy Efficiency Investments Financial options: own funding, third party financing, leasing, ESCO financing, rebates, incentives and others.

Additional Benefits of Energy-Efficiency Source-IEA, 2014