August 25, 2010

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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July 13, 2010

New Post on Digital Lumens blog

I posted a new entry on the Digital Lumens blog today about how energy efficiency investments must make financial sense.  There is a lot of 'green washing' that happens today when cool green ideas get a lot of hype because of their potential.  But, to get a customer to buy something, the product has to make financial sense right now.  Very few customers, particularly business customers, will make an uneconomic decision in the name of going green.  But, if you can tie strong economic benefits to strong 'green' benefits, you have a winner.  Energy efficiency is an obvious candidate because the energy savings can deliver a strong ROI.  But, the returns have to be pretty high to offset the upfront costs.  We've done that at Digital Lumens, and we try not to get too caught up on the 'green' side without keeping our eye on dollars and cents.

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