What’s the ROI / payback period of LED light bulbs and other green upgrades?

LED lightsSaving money and saving the planet are both great objectives for businesses. Luckily, they go hand in hand, as many sustainability upgrades pay for themselves very quickly with the energy and water they save (like LED lights, energy star appliances, water saving devices, and the like).

But how does the green-minded business manager prioritize the wide variety of ways to green one’s business? Payback period and Return on Investment (ROI) are two measures used to determine whether something is, financially speaking, a good use of your money.

Thus, these green initiatives can be analyzed using ROI and payback period measures, which will drive strategic decisions by green-minded companies looking to cut their carbon footprint while also saving money.

Let’s look at payback period and ROI for a fairly straightforward green initiative: swapping incandescent bulbs for LEDs.

Payback Period: LED light bulbs

Calculating a payback period is simple. You just have to compare a “new” scenario against your current scenario, and the only important outcome is how long it takes for the investment to pay for itself (to break even). There are, of course, a lot of variables and no case is simple. LED lights are a pretty easy one, though, so let’s use this as an example.

Just to keep the math simple, let’s say that you have one hundred 60 watt incandescent bulbs in your store or restaurant.  The first thing to do is calculate the number of kilowatt hours of electricity you’re using.

100 bulbs x 60 watts/bulb x 1 kilowatt / 1000 watts = 6 kilowatts (when in use)

Take that and add time:

6 kilowatts x 10 hours per day x 350 days per year you’re open = 21,000 kilowatt hours per year.

Multiply that by your utility rate for a kilowatt hour. The national average in the U.S. is roughly 12.5 cents per kilowatt hour, so we’ll use that for simplicity.

21,000 kWh x 12.5 cents / kWh = $2625 per year you spend on lighting

So that’s your baseline. Now let’s compare that to a new scenario in which you replace all your bulbs with LEDs. We’ll also add two more variables: the upfront cost of buying LEDs and the maintenance of the bulbs in both scenarios.

Scenario 1, where you do nothing, you now think about the replacement cost of the bulbs. Incandescent bulbs only last 1200 hours, on average. Thus, in the scenario, you’re basically replacing each bulb 3x per year. This adds about $3 per year, since these bulbs are pretty much dirt cheap.

3 changes per year x $1 per bulb x 100 bulbs = $300

Add this to your energy costs:

$2625 + $300 = $2925

Note that this does not include the cost of getting someone up on a ladder to change out lights. There is a cost there, but for simplicity sake, let’s ignore it.

Now, let’s look at scenario 2, wherein you swap all those bulbs for LEDs. At a cost of $4 per LED bulb, the price has significantly dropped in recent years, but still remains quite a bit higher than the incandescents.

EarthLED has awesome deals on LEDs. Screen shot from EarthLED.com

9 watts per bulb x 100 bulbs x 10 hours per day x 350 days per year x 1 kilowatt/1000 watts = 3150 kilowatt hours.

3150 kWh x 12.5 cents per kWh = $393.75 in annual energy costs.

LEDs last 50,000 hours, meaning there is no replacement cost in year one. So the total cost for the upgrade is just the cost of the bulbs plus $393.75, or a total of $793.75. Comparing that to scenario 1, you save roughly $2500 in your first year.

That’s not your payback period…that’s just the savings, but calculating a payback period is easy from these numbers. It’s the operating costs you want to use. In month 1, scenario 1 costs just the cost of the energy, since no lights need replacing. So that’s just $2925/12=$243. In scenario 2, you bought $400 worth of LED bulbs and spent $32 on electricity to power them, for a total cost of $432. In month 2, scenario one’s price goes up to $243×2=$486. In scenario 2, you only spend $32, since there’s no more bulbs to buy. Total price? $32 +$432 = $464.

So your payback period on these bulbs is slightly less than 2 months. I dare you to find me a stock that performs better than this! As you add replacement costs, labor of getting someone up on a ladder, the risk of someone falling off the ladder, and the ongoing electricity use of the incandescent bulbs, and the investment just looks better and better. Let’s look at ROI to get a clearer view of the the big picture.

Return on Investment (ROI) of LED bulbs

Calculating a return on investment is very easy. All you need to have is the cost of the investment, the savings, and the period of time you’re interested in examining. In most cases, ROI is calculated for one year, so we’ll just use that, since we already did the math above. ROI is calculated as the savings minus the cost divided by the cost, and is typically expressed as a percentage.

So in our case:

$2500 (savings) – $400 (cost)
_____________________                   =         525%

                $400 (cost)

Hard to argue those numbers. Investment portfolio managers would be absolutely stoked with a 50% return on investment. Getting 10x that is such a no brainer as to be laughable. What’s amazing is that Republicans can claim that banning these grotesquely inefficient and highly costly incandescent bulbs is an affront to Americans’ freedom to choose (something they obviously oppose in many other cases, like same sex marriage and reproductive choice), when it is clearly one of the easiest things companies and individuals can do to cut their bills, save money, and help make the world a better place. Of course, when you get huge political contributions from fossil fuel industries, you need to make sure that power plants that consume fossil fuels burn them unnecessarily and put financial burdens on all of us to help keep their political contributions coming.

But I digress. Now get up on that ladder (safely) and change out your LED bulbs!


About the Author

Scott Cooney (twitter: scottcooney) is an adjunct professor of Sustainability in the MBA program at the University of Hawai'i, green business startup coach, author of Build a Green Small Business: Profitable Ways to Become an Ecopreneur (McGraw-Hill), and developer of the sustainability board game GBO Hawai'i. Scott has started, grown and sold two mission-driven businesses, failed miserably at a third, and is currently in his fourth. Scott's current company has three divisions: a sustainability blog network that includes the world's biggest clean energy website and reached over 5 million readers in December 2013 alone; Pono Home, a turnkey and franchiseable green home consulting service that won entrance into the clean tech incubator known as Energy Excelerator; and Cost of Solar, a solar lead generation service to connect interested homeowners and solar contractors. In his spare time, Scott surfs, plays ultimate frisbee and enjoys a good, long bike ride. Find Scott on
  • A_Siegel

    Scott — it has been years since I’ve done the calculations / haven’t paid close attention (here is 2009 re CFLs, for example: http://getenergysmartnow.com/2009/08/18/cfls-cost-less/) and, wow, with the reduced price of LEDs, really astounding how much better the case has become (it was good before but …).

    In addition to the reduced labor climbing up to change lightbulbs, let’s add in some additional items:

    * Reduced stockage space for lightbulbs — don’t need 100 or more bulbs in the closet.

    * Reduced air conditioning bills — much reduced waste heat from lighting

    * Reduced risks — not yet into insurance, but reduced fire & other risks

    * Etc

    Thank you for a good look at this.

  • craig s

    Surely you have places where you have light bulbs that you use less than an hour a month. Maybe even less than that. Why force everyone to buy more expensive, higher efficiency bulbs for low to no use spots? And why interject politics into a bulb article?

    • Scott Cooney

      Sure, there are places where you won’t use a bulb for very long. But if you look at lifetime costs of operation, replacement, etc., it’s clear as day that buying an LED is actually FAR cheaper for the consumer than an incandescent. Putting the heavier cost onto a consumer is exactly what we’re trying to avoid by pushing an incandescent bulb ban. The problem is that if you don’t ban them, people who don’t know better will only look at the price at checkout, not the lifetime cost. LEDs are every bit the better bulb…safer, effective, lower lifetime cost. It’s a matter of viewpoint–short term, myopic thinking tends to dominate Republican ideology. It’s either that, or you’re a troll looking for ways to keep people addicted to consuming more fossil fuels…. either way, you’re doing no one any favors except for the rich and the greedy.

      • craig s

        That’s where you’re wrong… Freedom and Choice dominate Republican ideology. Consumers know and understand about life cycle costs, but some just don’t care and that’s their right. Democrats think they know better than everyone else and that if you don’t fall in line then you must just be too stupid to understand.

        • Scott Cooney

          That would certainly be the propaganda they’d like people to believe. It’s all a matter of what choices. I’d like to choose to have clean air. Your choice to support coal development and incandescent bulbs to burn that coal with impede my choices. Or like the freedom for a woman to choose her reproductive path? When she doesn’t know better than you do and doesn’t fall in line then she’s just too stupid to understand?

        • We just had to ban “Craig S” here. Lots of complaints about his comments, so he may be a troll. Sorry everyone. We’ll try to catch these guys sooner and ban them.

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