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Numbers don't lie...

...unless you ask them the wrong question.  Then they are merely deceptive.

Here's an interesting lesson on figuring out the right way to present financial analysis.  First some background:

This is based on a sales proposal we recently made at Digital Lumens.  We make energy-efficient intelligent lighting that can reduce lighting energy costs by 90% for industrial customers.  These lights are often eligible for rebates from utilities, and sometimes those rebates are proportional to the amount of energy saved.

Our light uses LED technology, but our current main competition is from fluorescent light fixtures.  These fixtures are an improvement over prior technologies, but not as efficient as LEDs.  What fluorescent fixtures have going for them is that they are a pretty cheap commodity these days.

We had a situation with a customer where their local utility had put a significant incentive in place for warehouse fluorescent lighting.  Because LEDs are pretty new for this application, they hadn't yet put in place a big incentive for LEDs.  So, we were at a significant price disadvantage.  Here's an obfuscated view of the numbers:

Current monthly lighting energy bill: $5,100

Fluorescent fixture upgrade cost, net of aggressive rebate: $15,000

Fluorescent direct energy savings: $2600/month

Simple fluorescent payback calculation: 5.8 months

LED fixture upgrade cost, with only a modest rebate: $70,000

LED direct energy savings: $4700/month

Simple LED payback calculation: 14.9 months

When you only look at energy savings, the LEDs are a tough decision here.  They have a higher initial cost than these inexpensive fluorescent fixtures, partly due to the aggressive rebate.  A customer could easily decide to buy the fluorescent fixtures as they are almost free and are paid for very quickly.

But, there are other components of ownership: tax incentives, maintenance, and the chiller effect.

This application is cold storage -- refrigerators and freezers.  The cost of keeping those cold and frozen dwarfs the cost of light.  And, LEDs have a benefit of running much cooler, greatly reducing the workload of the chiller.  You wouldn't run an oven inside a freezer, so why have a hot light inside?  This allows customers to capture an additional 40% or so of their lighting energy savings as reduced load on the chiller.  Think of this meaning that our 90% savings with just LEDs is really more like 140% savings.  In this case, you can save more than 100%

With this factored in, the fluorescent payback goes out to 18.8 months while the LED payback is reduced to 9.5 months.

If you graph the total cost of ownership month by month, it looks like this:


 

With the total cost of ownership view, the LEDs very quickly become cheaper than fluorescent, despite the significantly higher initial purchase price.  And, with the sort time horizon, we offered the customer a financing proposal so that they could match the lower initial cash flow of the fluorescent fixtures and still eventually get to the lower cost path of the LEDs.  That's a win-win for everyone.

Most importantly, it shows the value of digging into the numbers and understanding all the components of the total cost of ownership, even if industry convention is focused just on the simple payback.

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Comments

Mike, its great to address simple payback but the bigger picture is total cost of ownership or total return on the investment over time. I've been doing this a long time, if I had to guess the fixtures you're replacing have been installed for 20 years or more. Its really a capital investment decision ; you're providing light but you're really selling savings. Make sure the CFO or capital guys are involved in the decision and then show them the IRR or NPV over a 10 year window or more and they'll ask you how they can invest more considering that they're cash on the sidelines is probably earning

Also, the new build / renovation market has so many other ancillary benefits; double or triple the fixtures on a single circuit, less wiring "homeruns", fewer breakers, potentially even a saved lighting load center and the reduction in cooling necessary can be designed in from the beginning.

Great stuff, keep up the good work.

It's a big world but a small industry... stay in touch.

Greg, we are working directly with all the utilities. Unfortunately, they work on much longer time schedules than typical customer decisions. Digital Lumens recently received some certifications from the Design Lights Consortium, which is a seal of approval that makes things happen (relatively) faster with the utilities.

Mike...are you guys directly working with the utilities to get the rebate situation fixed?

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