Skip to main content
 

Jen Weiss is a Finance Analyst and co-author Jeff Hughes is the Director of the Environmental Finance Center.

At the time this blog post is being written, the holiday season is in full swing – cities have set up their holiday lighting and decorations, stores are offering all sorts of sales and financing offers (no money down…), and consumers everywhere are evaluating purchase decisions.  If you are like us, I’m sure this all makes you think about LED street lighting. No? Let us explain.

At least the street lights are LEDs?

Many consumers count on the ability to compare costs when making holiday purchasing decisions.  Online shopping websites have given us all the tools to shop around for the best price, the best shipping rate, and the best service.  But even though purchasing products online is quick and easy, part of every buying decision involves trade-offs. Do we spend more for a brand that we think will last longer or do we let short term cost drive the decision?  Do we purchase the latest and greatest gadget or do we purchase a tried and true product that has stood the test of time? As a consumer, I enjoy having the ability to make my own decisions – to analyze my options quickly and choose the one that works best for me given my objectives.  Wouldn’t it be nice if all purchasing decisions that governments had to make were this straight forward and simple?

Take the local government decision to purchase the street lighting for their city (a.k.a. those lights atop poles holding up large candy cane replicas and holiday paraphernalia). There is a hot product this year that many street light consumers are interested in – Light Emitting Diode lights, commonly referred to as LED lights.  LEDs are cool, LEDs are hot, LEDs are … well, LEDs are trendy and hip. But, LEDs are more than that too. They are more energy efficient than traditional lighting technologies, they have a longer operating life and they offer lower maintenance costs.  Many local governments are looking at LED streetlights as a way to reduce energy use and cut back on costs.  In a recent informal survey administered by the Environmental Finance Center to municipalities throughout North Carolina, 28 out of the 35 respondents indicated that they were starting to think about or were already developing a plan to upgrade their street lights.  And five of the surveyed cities were already in the process of installing or had already installed new LED fixtures. LEDs are fast becoming the municipal equivalent of the ubiquitous Furby doll – although arguably more sustainable.

But while the inherent benefits of LED street lights seem obvious, the true price of an LED street light upgrade is a bit of a moving target.  For starters, there is the cost of the fixtures themselves. Although prices have been heading downward, the purchase of LED lamps can be three to six times as expensive as their sodium vapor or metal halide counterparts.  And although this additional cost will most likely be offset by reduced energy and maintenance costs, analysis of LED street light upgrades must also include the cost to install them, to operate them, to maintain them, and last but certainly not least, the cost of electricity to run them.

To understand the true cost of upgrading to LED street lights, a savvy city manager or public works director must not only understand the underlying cost and benefits of an LED fixture, he/she must also understand the rate schedules offered by the local utility. Historically, outdoor street lighting assets have been owned by the electric utility and the consumer has paid a bundled monthly rate for the lights which include the fixture and installation cost, the operating and maintenance costs, and the cost of the estimated (few street lights are actually metered) electricity used. Many utilities do not even have a standardized published bundled rate for LED lights and, like Duke Energy, publish a nonstandard street light rate (NL), that requires calculating costs and actual rates on a case-by-case basis.  Utilities such as Duke have thousands of light poles across the service area and it is clear that the switch to LED lighting cannot occur overnight, but it could occur much faster if there were more options for sharing responsibility for this transformation between utilities and their customers.

A number of local governments have made commitments to reducing energy usage and green house gas emissions in their jurisdictions and have identified street lighting as an important element to meeting that goal. Some of these governments are willing to take the ownership and financing responsibility (and to take on risk) for more efficient lighting if given the opportunity. However, many utilities do not have a rate structure and established process in place that gives the municipalities the option to purchase the LED fixtures themselves or to make an initial contribution or “prepayment” to reduce the monthly costs. Without a rate structure that accommodates this responsibility transfer, the economics of acquiring more efficient LED lighting for these early adopters can be quite poor. Under many rates structures, a city that invests its own funds to install LEDs would have to take on the added capital cost of the fixtures without seeing any of the sizable benefit in expected energy use reflected in their bill since most public outdoor lighting is not metered. In these cases, the decision to upgrade (or more accurately not to upgrade) to LEDs is made on cost alone before the environmental benefits of the more efficient lighting is even given the opportunity to be considered.

Rates make all the difference in this process and some utilities are offering their customers choices in LED street light ownership and are giving municipalities the ability to compare rate structures.  For example, Duke Progress Energy Carolinas (now part of Duke Energy Carolinas) provides all of its municipal street lighting tariffs in its SLS-23 (updated as of 12/01/12).  In addition to listing the monthly charge for sodium vapor and metal halide fixtures, it also outlines two options for LED lighting:

Option 1: The LED Basic Rate (Utility-Ownership Option)

Option 2: The LED Basic Rate (Customer-Ownership Option)

Under this rate structure, the customer now has a choice.  It can either choose to let the utility purchase and install the LED street lights and pay one monthly price, or the municipality can choose to purchase and own the LED fixtures outright and pay the utility to install, operate and maintain them.  While this seems very straight forward on the surface, there’s one more cost that needs to be included.  For the Utility-Owned rate, Duke Progress also charges a monthly facility charge to represent the difference in prices associated with changes in LED fixture costs, fuel adjustments and general rate increases.  This is considered a variable rate and is added to the published base rate for LEDs.  The resulting ‘all-in’ monthly charge ends up being a bit higher than the basic rate listed on the SLS-23 and can be found at the bottom of the similarly named NC-SLS-19.

Here’s how the rates stack up for a representative city – let’s call it Holidaytown, NC.  During the busy holiday season, Holidaytown officials decided to examine different options for upgrading their street lights to provide more energy efficient lighting for their residents – with a goal of replacing 1,500 of their existing lights with LED fixtures. Assuming it has lighting stock similar to other towns in NC, Holidaytown could expect to pay $18,325 per month in bundled non-LED outdoor lighting rates. The Duke Progress Energy lighting rates allow a town like this to see how the impacts of taking ownership responsibility would impact their monthly utility charges:

 

 

Option 1 (Utility Owned)

Option 2 (Customer Owned)

Type of Fixture

Quantity

Monthly Per Fixture Charge

Total Monthly Charge

Monthly Per Fixture Charge

Total Monthly Charge

LED 75

750

$11.86

$8,895

$5.40

$4,050

LED 105

500

$13.73

$6,865

$5.87

$2,935

LED 215

250

$21.96

$5,490

$7.52

$1,880

TOTAL:

1,500

$21,250

$8,865

 

As this example shows, upgrading to LED lights would result in a higher monthly utility charge under Option 1.  And given only that choice, the town may have chosen not to upgrade. But under Option 2, the customer owned scenario, the monthly charge paid to the utility is reduced by more than 50%. This, of course, is not the entire story – Option 2 does not include the cost of the fixtures. Based on LED fixture prices from projects currently underway, the  estimated total fixture charge is approximately $490,000. A simple analysis should tell us which of the options listed above provides the city with the best return.  But before that calculation is done, there is one more cost to include.  There is also a $50 per fixture ‘Lighting Change Out’ charge for any street light that has been in service for less than 20 years.  In this particular example, we’ll assume that one third of the town’s lights are less than 20 years old resulting in an additional change out cost of $25,000 to upgrade all of their lights in either of the scenarios listed above. With the addition of this change out charge and a contingency cost of 10%, the total one time upgrade cost for the town is estimated to be $560,000.

With all the costs accounted for, the town is able to compare the net present value (NPV) of all the cost scenarios and make an informed decision.  Note that in this case, a lower NPV is better:

Option

One Time Upgrade Cost

Annual Utility Charge (Year 1)

10 year NPV

Base Case (Current Lighting Fixtures)

NA

$219,900

$2,062,683

Option 1 (Utility-Owned LED Fixtures)

NA

$255,000

$2,449,298

Option 2 (Customer-Owned LED Fixtures)

$560,000

$106,380

$1,547,329

While the NPV analysis clearly indicates that Option 2 – the Customer-Owned option – offers the best return, Holidaytown’s officials still have one more financing consideration to make. Due to the busy holiday season, the town has limited cash with which to make an investment and therefore is considering using debt financing to fund the entire project.  A lender offers the town a $560,000 loan at a rate of 3.65% for a 10 year term.  With this financing in place, the town’s annual cash flow comparison looks like this:

Option

Annual Utility Charge (Year 1)

Annual Debt Service

Total Cost

Base Case (Current Lighting Fixtures)

$219,900

$0

$219,900

Option 1 (Utility-Owned LED Fixtures)

$255,000

$0

$255,000

Option 2 (Customer-Owned LED Fixtures)

$106,380

$67,963

$174,343

Once all the costs are taken into account, the path the town should take is clear.  With the ability to finance the upfront fixture cost, the town will save money and reduce carbon emissions by choosing Option 2.  By giving local municipalities the ability to compare the two rate structures and make a decision to fit their needs, Duke Progress has opened the door for more LED street light investment in the communities that it serves without requiring their entire customer base take responsibility for purchasing fixtures.

While there is still a long way to go before LED street lights become an easy decision for a municipality to make, the two rates offered by Duke Progress and other utilities at least give the municipality the ability to choose.  And, in the end, that might make all the difference.

One Response to “What a Difference a Rate Makes”

  1. Tobin Freid

    Thanks for this interesting analysis. It is helpful to see how a municipality could do this analysis if they are in Progress territory.

    Reply

Leave a Reply