Workplace Illumination – Part 18: Lighting Cost Analysis

            Cost is a critical component of any project to be predicted, monitored and controlled.  It is the one metric that everyone understands, at least on a superficial level.  Deeper understanding of project costs requires insight into the sources, benefits, and alternatives available.  Various tools are available to document and compare lighting system designs.
            Basic methods often lack accuracy, but are useful for preliminary screening purposes.  More-sophisticated methods capture greater detail, facilitating assessment of the impacts of design decisions and assumptions on project costs.  In this installment, common cost analysis methods are presented, from the simple to the complex.

Cost Categories
            Cost estimates become more accurate with increasing detail.  Defining cost categories facilitates the collection of information at an appropriate level of detail.  Categories may be defined differently by organizations or individual practitioners.  If no project-specific guidelines have been established, it is useful to employ a framework based on five (5) phases of a lighting system life cycle; each phase is discussed below.  Examples cited are representative, but not comprehensive; a project team must capitalize on its members’ knowledge of the facility, objectives, and available resources to generate the best possible cost estimate.
            Acquisition (1) costs include the direct cost (i.e. price) of components, materials, and supplies required to construct the lighting system.  Transportation of goods to the installation site also incur acquisition costs; taxes and other fees that may be assessed on materials or transportation should also be included.  Administrative costs, such as those associated with generating and tracking purchase requisitions, coordinating shipping and receiving schedules, and similar tasks can also be accounted for here.  If these costs do not differ significantly among project alternatives, they will not affect comparisons, but are needed to track total project cost.
            Installation (2) costs include labor, equipment rentals (e.g. lifts, temporary lighting), tools, and incidentals.  For large installations, the quantity of packaging material may be substantial; its handling and disposal may warrant tracking as a separate line item.  Work performed during normal business hours may cause a loss of productivity.  The impact of any interruption to operations should be included here.
            The operation (3) phase typically has the greatest impact on system cost.  Electrical energy is the most-salient cost of operation, but it is one of several.  It is influenced by daylighting (see Part 13), control strategies, (see Part 12), selection of luminaires and constituent components (see Part 11), and properties of the space (e.g. size, surface reflectances).  Assessments of each must be realistic for cost estimates to be valid or useful.  For example, an intended control strategy may be overridden by occupants because it is ineffective in supporting the visual tasks performed.  Overly-optimistic estimates may be attractive to planners, but can lead to cost overruns and project failures.
            The effects of daylighting apertures and electric lighting on heating and cooling loads must also be considered.  An HVAC system may operate more frequently, or with longer cycles, to compensate for these effects.  A system that must be resized to accommodate the effects of lighting can incur significant costs for installation and operation that should be attributed to the lighting system design in cost calculations.  In an ideal case, operation of a lighting system would decrease the load on the HVAC system, such as when operating in a cold environment.  For this ideal case, a negative cost (i.e. benefit) should be recorded.
            Maintenance of the lighting system is also a significant contributor to operational costs.  Luminaires require periodic cleaning to maintain lumen output.  Relamping may be done individually, as lamps fail, or in groups, as lumen output declines below acceptable levels.  The effective service life and failure rate of ballasts and other system components should also be considered in maintenance cost estimates.
            Decommissioning (4) a lighting system can be considered the opposite of installation.  Many of the same costs are incurred; similar labor and equipment are needed in both phases.  Packaging materials may be required to prepare the removed system for transport to a recycler or refurbishing facility.
            The final phase, disposal (5), incurs costs of transportation of the removed system to an offsite location and any fees charged for accepting the material.  If the system is expected to have salvage value, whether for scrap or reuse, its residual value is recorded as a negative cost.
            The boundaries of these categories are subject to interpretation.  For example, packaging required for transport of a decommissioned system could be associated with decommissioning or with disposal.  Transportation of goods and materials could also be treated as its own category, rather than a component of others.  Myriad variations are possible; specific boundaries of cost categories are not critical to analysis and this framework is not intended to dictate any.  The collection format is secondary; it need only serve the project team’s efforts to generate thorough and comprehensible cost estimates.

Financial Metrics
Cost of Light
            The cost of light can be used to compare alternative lamps installed in the same luminaires.  This may be done to evaluate a change in lamp technology, such as upgrading from incandescent lamps to compact fluorescent lamps or screw-in LED modules.  The cost of light for each lamp is calculated as:

where:

• Clight is the cost of light ($/Mlm-hr);
• Φlamp is the mean lamp flux (lm);
• Clamp is the cost of one lamp ($);
• Clabor is the cost of labor required to replace one lamp ($);
• Llamp is the average lamp life (hrs);
• W is the mean input power per lamp, including losses (ballast, etc.) (W);
• Cenergy is the cost of electricity, including demand-based charges ($/kWh).

            While the applicability of a cost of light comparison is limited to lamp replacements, it may be a useful element of a broader analysis.  It does not account for the time value of money (TVM) or maintenance factors, but these factors can be addressed elsewhere in the analysis before a final decision is reached.

Basic Metrics
            Simple payback, as its name implies, is one of the easiest terms to calculate:  P = I/A, where P is the simple payback period (years), I is the incremental investment ($), and A is the incremental annual cash flow ($) expected.  The simple payback period is the time required for an investment to “pay for itself” if TVM is ignored.  Smaller values of P are preferred; project acceptance in many organizations is contingent upon P ≤ 3 years.
            An incremental investment (I) is the cost of an alternative relative to another.  If a project investment is compared to the status quo (the “do nothing” option), I is the total project cost.  If two potential project plans are compared, I is the difference in cost of the plans.  Similarly, the incremental annual cash flow (A) is the difference in annualized benefits, less annualized costs, of two options.
            An alternative expression is the simple rate of return, which is the reciprocal of the simple payback period, expressed as a percentage:  ROR = (A/I) x 100%, where ROR is the simple rate of return (%); A and I are as previously defined.  ROR provides the share of the initial investment (I) recouped each year by the annualized cash flow (A).  Higher ROR is preferred; a screening value of 20% is often used for project consideration.
            When TVM is considered, the discounted payback period and discounted rate of return (DROR) are calculated.  Discounting facilitates comparison of alternatives with different project lifespans by converting all cash flows to present value (PV or P).  Subtracting the initial investment (I) from PV yields the net present value (NPV) of a project:  NPV = PV – I .

Discounting
            Annualized costs and benefits are converted to present value with the following calculation:

where PV is the present value, or present worth, of the annualized cost A ($) incurred over a period of y years when the interest rate is i, expressed as a decimal.  This is known as the uniform present-worth factor; A and i are “uniform”, or constant, throughout the period of concern.
            The system’s salvage value is converted to present value by calculating the single present-worth factor:

where PV is the present worth of the project at the end of its useful life (EOL), F is the future worth of the project (i.e. salvage value) at EOL, y is the time to EOL in years, and i is the interest rate, or discount rate.
            Summing the PVs of all annualized costs and benefits attributed to the project and the project salvage value yields the present value of the lighting project.  Subtracting the initial investment, without discounting (occurs at time 0), yields the net present value (NPV) of the lighting system.  Comparing NPVs of alternatives provides a straightforward assessment – that with the highest NPV is the preferred alternative.
            The PV calculations above assume constant interest rate and annual cash flows.  Applying an inflation rate, r, to the annualized cash flows, present value is calculated according to:

If the inflation rate, interest rate, or annualized costs vary, the use of tabulated multipliers is in order.  Rather than a single calculation, the present value of each year’s costs are calculated using the multipliers in Exhibit 1 and summed:

            Present value calculations are summarized in the upper section of Exhibit 2; graphical representations of cash flows are also provided.  The lower section provides corresponding information for calculations to convert present and future values to equivalent annualized cash flows.
            The process of calculating and comparing present values of project alternatives may be referred to as life cycle cost-benefit analysis (LCCBA).  IESNA has provided a sample worksheet, shown in Exhibit 3, to facilitate LCCBA.  Its format is conducive to entry in spreadsheet software to minimize calculation errors and iteration effort.  Doing so also simplifies modification, should it be deemed appropriate, to suit a project’s analysis and presentation needs.
            As the discount rate (i) increases, the present value of an investment decreases.  The value of i at which the NPV of an investment is zero is called the internal rate of return (IRR).  It is used to compare an investment’s returns to a baseline value, known as the hurdle rate, established by a firm’s cost of capital, the level of risk inherent in an investment, and other factors.  For an investment to be considered, its IRR must exceed the hurdle rate.  Investment decisions should not be based exclusively on IRR, however, particularly when comparing alternatives with different life spans.  IRR and NPV are inextricably linked by definition and should be reviewed in conjunction.

Life Cycle Sustainability Assessment
            The categories and calculations described above focus on direct financial costs of lighting systems.  While economic analysis is critical to project success and firm solvency, there are other factors to be considered in lighting system design.  These are addressed in a life cycle sustainability assessment (LCSA).
            Financial considerations are one component of a full analysis, called life cycle costing (LCC) in the LCSA context.  The essentials are described above using the LCCBA moniker typical of general discussions of the topic.
            In addition to the economic implications of a project, LCSA considers its environmental, ecological, and social impacts.  Environmental and ecological impacts are studied in a life cycle assessment (LCA).  Potential ecological effects of lighting were introduced in Part 17, including changes in plant and animal behaviors.  Environmental impact studies consider the broader implications of material and energy use in the construction, transportation, operation, and disposal of lighting system components.
            Social impacts of lighting are also derived from nuisance light (Part 17) and security lighting (Part 16).  LCSA elevates these topics from secondary considerations to primary subjects of analysis.  This analysis comprises the social LCA (SLCA) component of LCSA.
            To the extent that environmental and social impacts can be assigned monetary value, these factors can be included directly in calculations of financial metrics.  The remainder of the analysis requires other methods, including simple judgment and ethical guidelines, to determine proper courses of action.  This is an expansive topic; however, this brief introduction must suffice for the current presentation.

Cost Control
            In each phase of a lighting system life cycle, basic cost control methods can be used to improve the financial viability of a project.  Some are described, in brief, below; a project team’s depth of knowledge supports detailed analyses that optimize cost and performance of systems.
Acquisition:  Use of recycled materials can lower cost and environmental impact of an installation.  Lighter-weight components reduce transportation costs and may require less packaging, further reducing material costs.  Any change in performance resulting from lightweighting efforts must be fully analyzed for compatibility with project objectives.  Adjustments to service life and maintenance requirements must also be made in the cost calculations.
Installation:  Lighter components may reduce the cost of labor and equipment used to install a system.  Less-expensive mounting hardware may also be capable of handling the reduced load.
            For a retrofit application, scheduling of installation activities can have a tremendous influence on project cost.  Coordinating installation to minimize the impact on operations can make a huge contribution.  Ideally, all installation work would occur outside normal hours of operation.  Staggered deliveries of materials can also reduce the impact on operations.  A large stockpile may interfere with normal activity, slowing or preventing some activities or requiring additional handling.  Similar concerns exist in new construction, though the nature of competing activities is quite different.
Operation:  A substantial portion of operational cost control relies on optimization of lighting controls.  Control systems that do not serve occupants well will be overridden and potential savings lost.  Ensure that the benefit of daylight is maximized; excessive glare will cause shades to be drawn and the required illuminance replaced by electric lighting.  The addition of a light shelf or other device may be needed to capitalize on available daylight.
            Similarly, automatic dimming controls or occupancy sensors will be deactivated if they are too aggressive or restrictive.  This returns the system to manual control, suffering the corresponding inefficiencies that the automated controls were installed to avoid.  Reprogramming control systems, with input from occupants, ensures that those occupants are well-served at minimum cost.
            Lighting system maintenance is also a substantial contributor to operational cost and, therefore, to potential savings.  Regular cleaning of luminaires contributes to lumen maintenance, extending relamping cycles.  In dusty environments, air filtration can reduce the frequency of cleaning needed to maintain required illuminances.  Contamination of luminaires can also cause heat buildup that can shorten lamp life, increasing the value of cleaning efforts.  When relamping is required, lamps with low lumen loss should be selected to further extend relamping cycles.
            These are direct inputs in the cost of light calculation presented above.  Development of LEDs has brought great improvements in cost and performance, making them viable alternatives in increasing numbers of applications.  This is also true of many relamping applications, though compatibility with the rest of the lighting system must be confirmed prior to selection.
            Where relamping with LEDs is not possible, system replacement may be warranted, as LED performance seems to have not yet peaked.  Analogous to Moore’s law for computing power, Haitz’s law for LED technology predicted, in 2000, that luminous flux would double every 18 – 24 months.  Whether this has held true is unclear, as measurement techniques differ; however, the cost per lumen has certainly fallen dramatically since this prediction was made.
Decommissioning:  Strategies used to reduce installation cost also apply to decommissioning.  Considering both in the planning stage of a project yields the best results.  During installation, information that could be helpful when decommissioning a system should be documented in the project file to support planning for this phase of the life cycle.
Disposal:  Minimizing cost of disposal requires planning at the outset of a project.  Material selections are key to this effort; recyclable materials typically incur less cost than disposable materials, for example.  A better alternative may also be available, in which the lighting system is sold for reuse.  For example, the lighting requirements may have changed in the facility in which a system was initially installed, though the system remains fully functional.  Installing this system in a facility for which it remains suitable provides cost and environmental benefits for both facilities.
            These are only high-level recommendations that can be used to initiate discussions of impact reduction.  As stated previously, it is the project team’s creativity and deep knowledge of the installation that will optimize lighting system design.


            All of the calculations and potential substitutions discussed in this installment are based on one simple assumption:  performance of alternatives is comparable.  Illuminance, uniformity, glare, spectral content, and other criteria must be within specifications for assessment and comparison to be valid.  An ineffective lighting system encourages workarounds, such as adding unplanned task lighting.  The net result is almost certainly less efficient and more problematic than a system well-designed from its inception.


            For additional guidance or assistance with Safety, Health, and Environmental (SHE) issues, or other Operations challenges, feel free to leave a comment, contact JayWink Solutions, or schedule an appointment.

            For a directory of “Workplace Illumination” volumes on “The Third Degree,” see Part 1:  An Introduction to Lighting (21Aug2024).

References
[Link] The IESNA Lighting Handbook, 9ed.  Mark S. Rea (ed).  Illuminating Engineering Society of North America; 2000.
[Link] The IESNA Lighting Handbook, 10ed.  David L. DiLaura, Kevin W. Houser, Richard G. Mistrick, Gary R. Steffy (eds).  Illuminating Engineering Society of North America; 2011.
[Link] Energy efficiency in buildings:  CIBSE Guide F, 3ed.  The Chartered Institution of Building Services Engineers; May 2012.
[Link]  “Introduction to energy efficiency.  A companion to CIBSE Guide F:  Energy efficiency in buildings.”  David Cheshire.  The Chartered Institution of Building Services Engineers; May 2012.
[Link] Handbook of Advanced Lighting Technology.  Robert Karlicek, Ching-Cherng Sun, Georges Zissis, Ruiqing Ma (eds).  Springer International Publishing; 2017.

Jody W. Phelps, MSc, PMP®, MBA
Principal Consultant
JayWink Solutions, LLC
[email protected]