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Calculating the Return on Investment for Lighting Retrofit Projects
This entry was posted on January 26, 2012.
As much as I don't like it, lighting retrofit projects for warehouses and commercial offices have to compete for corporate funds just like all other projects. If it was up to me, lighting retrofits would just be given the green light and prioritized above all other capital requests, and corporations large and small would come flocking to RelightDepot for their energy efficient lighting needs. In the real world, project sponsors have to justify why they want to spend money on new lights if the existing ones work just fine. The most common way to do that is by building a business case that includes a return on investment (ROI) and a simple payback calculation. In this article, I'll walk you through the simple math that will help you prove that the money spent on a lighting retrofit is money well spent.
Before we begin, there are a couple of pieces of information that you'll want to gather in order to plug into the ROI formulas below. These are the following:
- Total number of existing fixtures. Take advantage of our lighting audit form to capture the details you'll need for your lighting retrofit.
- Total system Watts for the existing and new fixtures. Refer to the Total System Watts for Old Fixtures article to look up typical system wattage values for common industrial fixtures. Most of the fixtures in our catalog include the system wattage you can use for the new fixture section of the formula.
- Operating hours per year. This is simply the total number of hours the lights are on during one year. This can be calculated by taking the Work hours per day and multiplying by work days per year. If the lights are never turned off and operate 24 hours per day for 365 days per year, the burn hours would be 8,760 hours per year.
- Cost of Electricity per kilowatt-hour (kWh). Electric bills aren't the easiest things to decode. Some have multiple per-kWh charges in addition to peak and demand charges. We find the easiest thing to do is to total all of the per-kWh charges and divide by the total kWh consumed. You can also back out any fixed lease charges (outdoor lighting, for example) and divide that number by the kWh consumed. For quick calculations we use $0.10 per kWh but you could also just use the average retail electric rates that are listed by state on the Department of Energy website.
With these values in hand, it's time to calculate the annual savings from a lighting project and get to the return on investment and simple payback formulas.
Calculating Annual Savings for Lighting
The first part of calculating the ROI is to figure out how much the new lights would save us in a singe year. This can be done by plugging the values above into the formula below:
Annual Savings = # of Fixtures X Burn Hours per year X kWh Rate X ( (Existing fixture system wattage - New Fixture System Wattage) / 1000 )
Lighting Return on Investment
The Return on Investment calculation for a lighting project provides a way of measuring the amount of benefit the organization will receive from the new lighting project relevant to the amount of investment that is needed in order to purchase and install the new lights. The ROI is typically displayed as a percentage and you can easily think of it as the percentage of the investment that the project will return in profit over one year. Any utility rebates, or other State and Federal incentives that may be available, could significantly improve the outcome of the return on investment calculation. Feel free to contact us or refer to the Database of State Incentives for Renewables and Efficiency if you would like to find out what additional incentives you may qualify for.
ROI (%) = ( Annual Savings + Total Rebates ) / ( # of Fixtures X Installed Cost per Fixture ) * 100
Return on investment may also be expressed in dollars. This is typically done when looking at the ROI over a certain period of time. If your organization prefers this method, it would typically define how long the ROI period should be. I've seen this be five or 10 years with our customers.
ROI ($) = ( # of Years in Period X Annual Savings ) + Total Rebates - ( # of Fixtures X Installed Cost per Fixture )
Lighting Payback Period Calculation
The payback period is the amount of time it would take for the new lighting project to generate enough savings to make up for the investment required to complete the project. After this point, all of the savings that the project generate go straight to the bottom line for the company and can be used to fund other initiatives.
Payback Period (Years) = ( # of Fixtures X Installed Cost per Fixture ) / Annual Savings
Count On Us
Of course, we would be more than happy to walk you through any of these calculations. We could also investigate what rebates may be available for your project and can even arrange for one of our partners to go through your facility and count up lights. All you have to do is contact us and we'll take it from there.