What Determines a Good ROI for Your Lighting Upgrade?

Oct. 24, 2018

LED technology is very energy efficient, but what determines a good return on investment (ROI) with a lighting upgrade? Let’s look at some of the variables that affect the payback period and how these factor into calculating the ROI.

For most facility executives, it’s no longer a question of whether to improve energy efficiency; it’s a matter of how best to achieve that goal. Since LED luminaires were introduced for general illumination over 14 years ago they have proven to outperform all previous light sources. Their costs are now at such a low level that they can be used in any application.

In fact, the Department of Energy (DOE) forecasts that LED luminaires used in general illumination applications have the potential to reduce U.S. lighting energy consumption by nearly 50 percent, and LED lighting will represent 84 percent of U.S. lighting sales by 2030.

LED technology is very energy efficient, but what determines a good return on investment (ROI) with a lighting upgrade? Let’s look at some of the variables that affect the payback period and how these factor into calculating the ROI.

Incentives and Tax Deductions 

Many utility companies offer some form of incentives for commercial efficiency projects, including lighting.

[Related: The Impactful Benefits of this LED Lighting Retrofit]

Most incentive programs run on a fiscal year and are allocated based on application approvals, so budgets are limited and funding can be depleted early in the year.

Incentive programs come in two basic forms:

  1. Prescriptive: A set dollar amount assigned to each product category, type and energy savings target. Prescriptive are based on one-for-one upgrades.
  2. Custom: Considers the whole project. Generally, it’s used when there are unique circumstances, such as a reduction in luminaires and/or when controls are added. Custom programs can also involve total project costs that include installation. 

Research the program and follow the application/documentation process. Many programs require an application be filed prior to orders being placed and/or the completion of fieldwork. Notices to proceed are common, so make sure you have that first. Custom programs may require post-application filings and field verification information.

[Another example: Lighting Upgrade Transformed this Data Center]

Energy saving incentives are available for a variety of amounts. It’s all in knowing what your options are based on the available programs.

  • The federal government offers a tax deduction for qualified energy efficiency projects incorporated into commercial buildings. Under the Section 179 Deduction (179D), customers can reduce their taxable income through the use of the 179D deduction as it applies to lighting upgrades.
  • Utility companies will often provide incentives in the form of reducing energy costs by a specific percentage if a certain kWh reduction is met. The project may qualify for incentives that include a percentage of the total cost covered.
  • Online databases, such as the Database of State Incentives for Renewables & Efficiency, are available to search for national and state incentives. This specific website allows you to narrow your search parameters by market, technology, utility and incentive type.
  • Distributors, contractors and manufacturers can help research the energy program and submit the application on behalf of the end-user.

Energy Consumption

When a facility’s lighting is upgraded to LED, the main benefit achieved is a direct reduction of the watts consumed by each lighting fixture. These benefits are evident just from looking at luminaire specifications.

For example, by replacing a 460-watt metal halide fixture with a 180-watt LED luminaire the power consumption is reduced by about 60 percent.

Years ago, some properties were underlit using lower wattage traditional light sources. Reasons for this varied from:

  • Property usage (hours in use)
  • Lower security concerns
  • Design mistakes

As time passed, factors that influenced the original design changed, such as growing security concerns or increased nighttime use. 

To improve the lighting conditions in these types of situations, a higher wattage/lumen output HID would be used, so LED luminaires that provide light levels consistent with the replacement of the higher wattage HID luminaire (400W metal halide) must be used.

For example, illuminating a parking lot with 250W metal halide (MH) that should have been lit with 400W MH, it will be upgraded with a 150W to 180W LED. The 250W luminaire input wattage is about 280 watts, so the difference is less than if the upgrade was replacing 400W MH.

People often think an investment that takes more than two years to pay for itself isn’t good, but where else could an investment be made that yields a return of 50 percent or greater annually?

The reduction in energy consumption compared with increased light levels is important when assessing the upgrade’s ROI. The need to improve light levels for safety takes precedence over the ROI. In some cases, a reasonable ROI – 40 to 50 percent savings over three to six years – can still be achieved while increasing and improving the levels.


For many facilities, maintenance is a chief deciding factor on what type of lighting to install. The longer the bulbs and ballasts last in any fixture, the less manpower and equipment is required to keep them running properly.

LED luminaires virtually eliminate maintenance costs because the only maintenance that should ever be needed is the power supply.

(Photo: Example of ceiling of library with LED lighting)

Unfortunately, with traditional lighting sources, because of the expense of renting a bucket truck, end-users often wait for batch re-lamping so it’s done at one time, which makes sense except when you consider the reduced illumination and light levels.

[On topic: Fluorescent Lamp Disposal: Box and Store vs. Bulb Crushing]

Furthermore, annual maintenance costs on this technology increase as the fixtures age because in addition to the lamp needing to be changed, the ballasts, lenses and doorframes all need replacing throughout the life of these fixtures.

In large facilities, even more weight should be given to maintenance costs. Maintaining adequate lighting levels in facilities with more than 200 fluorescent or metal halide fixtures can easily become a nearly full-time job for maintenance crews.

Swapping bulbs in fixtures over high-production lines can also cause work stoppages, yet leaving burned-out bulbs in place until the end of a shift can cause a dip in output or faulty workmanship because of poor visibility.

Reduced maintenance and energy costs translates into a shorter ROI.

Acceptable ROI

Replacement of outdated lighting systems allows for the fastest ROI for facility managers — paying for themselves within an average of three to five years or less — as well as a practical way to reduce operating costs (in some cases by as much as 25 percent) for the total facility.

What’s an acceptable payback on this investment? This is subjective. For example, if an end-user has intentions of owning a property for a long time, then a three- to four-year ROI may be acceptable particularly since the life of an LED luminaire is about 10-plus years.

However, people often think an investment that takes more than two years to pay for itself isn’t good, but where else could an investment be made that yields a return of 50 percent or greater annually?

Energy consumption, rebates and incentives, and maintenance costs are all factors that must be considered when assessing the ROI on upgrading from a traditional lighting system to LED luminaires. If all these variables are positively in play, than the ROI will be short and your facility will reap the benefits of a smart investment.

Jeff Gatzow is vice president of California-based Optec LED Lighting and may be reached at [email protected]. Jeff has worked in the sign and lighting business for 29 years, the past five with Optec overseeing product development, sales/distribution and marketing. He is an active member of the Illuminating Engineering Society of North America

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