Last week, I outlined the first of a two-part response to the question, “Are LEDs ready for prime time?”  After an enthusiastic ‘Yes!’ I went on to address the issues of performance and quality.  The second part of the response is around cost.

Yes, the initial purchase price for LEDs is higher than other lighting solutions.  LED fixtures are more sophisticated and expensive than legacy “brass & glass” fixtures.  Accurately assessing the cost of LED solutions requires a shift in thinking.  In addition to looking at the up-front costs, you have to evaluate return on investment (ROI), payback and total cost of ownership (TCO) to get the full impact.  Here’s a summary of each:

1)    Up-front costs – What will it cost to acquire and install the new lights? The equation: purchase price + installation costs, less any offsets (utility rebates and/or tax credits, which can be substantial).  Simple math.

2)    ROI (return on investment) – The ROI equation: savings per year divided by up-front costs.  Or the payback equation: up-front costs divided by the annual energy savings, with an eye on when the anticipated savings cover the initial purchase price (time horizon).

3)    TCO (total cost of ownership) – This is the whole story, including all the variables across a five- or ten-year period. The equation: up-front costs less offsets, annual energy, maintenance, and cooling savings.

When you delve into those considerations, you will have the framework for a thorough evaluation of LED costs and can then begin to consider what type of LED investments you are willing to make.  Will you adopt legacy or ‘dumb’ fixtures that simply replace other illumination sources with LED packages, or will you invest in intelligent LED systems that combine multiple technologies with LEDs to drive even more dramatic savings?

My experience is that the math on the ‘dumb’ LED fixtures translates to a 4-to-6-year return on investment because the energy savings – while better than other lighting technologies – are not sufficient for most corporate investment criteria.  In contrast, intelligent LED-based systems, with LEDs and integrated intelligence, deliver more aggressive energy savings and bring the ROI in around the two-year mark.  Of course, that intelligence has other benefits and opportunities, as well, but I will explore that at a later time.

In the meantime, I’d be interested to hear about your experiences evaluating the LED equation, or any questions you might have.