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LED street lighting the new challenge to old utility business models
By Dan Cro ss-Call & Dan Ho we

Rocky Mountain Institute A lot is being said about various threats to the electric utility business model. At their root, many of those threats are really a f undamental misalignment between utilities revenue model and their customers own f inancial needs and service pref erences. More of ten than not, solar PV f igures centrally in these conversations. But a new and unexpected threat is emerging: street lights. For any level of government responsible f or managing roadways, street lighting is a critical service. Among other services, ef f ective and targeted lighting on roadways candramatically improve auto and pedestrian saf ety. Now, emerging technologies such as energy-ef f icient LED lighting are creating a dramatic opportunity f or consumer-side cost savings, as well as the potential f or a much broader suite of municipal services via LEDintegrated smart sensors, and with it the possibility f or upending a staid and overlooked component of the traditional utility service of f ering. Clearly, these are not your grandf athers street lights. In some cities, the municipality owns the streetlights and pays the utility f or the energy those lights use. But in most cities around the country, the local electric distribution company provides overhead street lighting as a basic service at a f lat monthly rate per light, which includes the light itself , maintenance, and electricity. T herein lies the rubregulated utilities of ten have little incentive to invest in more ef f icient streetlights, which of f er a reliable, consistent, and of ten lucrative revenue stream that comes at a time of day (or night) when demand is low. Despite a seeming incentive f or utilities to invest in ef f iciency and thus increase the prof it margin between the f lat monthly rate they charge municipalities and the kilowatt-hours that are bundled in that rate, installing a more ef f icient street lighting system typically requires approval f rom the state PUC, including tarif f updates to ref lect the new costsa process that would erode any cost savings the utility would hope to capture. Yet ef f icient streetlights could save cities and towns tons of money if these municipalities were able to capture all the inherent savings in energy and maintenance promised by the new technology. In f act, street lighting of ten represents the highest single energy-related expense in municipalities annual budget, of ten running into the millions of tax dollars per year. As public revenue streams constrict in the wake of the economic recession, governments are exploring new public-private partnership models such as perf ormance contracting and privatization to try to drive down lighting costs where the city owns the system, and are leveraging regulatory agencies to allow public buy-outs of utility-owned systems. A 2008 study by the New York State Comptrollers Of f ice showed that the town of Union, NY, was able to capture savings of approximately 40 percent, or $13.1 million, over the term of a 20year bond used to buy out the street lighting system f rom the local utility.

LEDS, COMING TO A STREET NEAR YOU

With semiconductor-based, solid-state LED lighting, the tension between utilities and municipalities is likely to grow. LEDs of f er a host of benef its: a higher-quality available light spectrum, a more narrowly directed light beam, the ability to dim to match ambient light conditions and needs (thus helping to reduce light pollution), and the f act that bugs are not attracted to LED lights as they are to the ultraviolet light cast f rom conventional street lights. In addition, there are signif icant economic benef its, including drastic ef f iciency improvements, much longer lif etimes with minimal maintenance requirements, and resilience to petty vandalism. Cities everywhere are beginning the conversion to LED street lighting and reaping the economic rewards. For example, 40 percent of streetlights in Boston were converted by the end of 2012, saving the city $2.8 million annually in electricity costs alone. Including reduced maintenance costs and other savings, Boston expects a payback period of only two to three years (sooner if rebates f rom its local utility are f actored in). Los Angeles likewise recently completed a transition of 141,000 streetlights, the largest single conversion project in the U.S. T he city expects to save $7 million in electricity savings and $2.5 million in avoided maintenance costs per year. T he $57 million dollar project was f unded in part through a loan f rom the Los Angeles Department of Water and Power, which will be paid back over seven years out of electricity and maintenance cost savings. T he State of Vermont providesanother example, where a partnership between electric utilities, the states ef f iciency utility Ef f iciency Vermont, and municipalities has resulted in revised utility rate structures and capital investments that will provide 8,000 MWh of energy savings. More pressure to convert is being applied on the f ederal level in the wake of a U.S. Department of Energy study that f ound a hypothetical f ull conversion of existing U.S. street lighting LEDs could reduce nationwide energy demand by 8.1 Terawatt-hoursor 50 to 70 percent below the studys base case of high pressure sodium bulbs and saving 5.7 million metric tons of annual CO2 emissions. Utilities, long incentivized by business models and rate structures that promote selling more kilowatt-hours, are less than lukewarm about this prospect.

ONLY THE TIP OF THE ICEBERG

Yet LED lightings energy ef f iciency and other benef its are only the tip of the iceberg. When married with other electronic communication devices, sensors, and sof tware intelligenceall built upon the underlying semiconductor technologyLED streetlights could become sophisticated nodes on a potentially ubiquitous digital network (located on every street in every municipality, and on highways between cities), capable of sensing their own activities and the environment around them, and controlling their own operation and other inf rastructure nearby.

Imagine: all those thousands of poles evenly spaced on nearly every street in your town, and along highways connecting you with other towns, could be not only sources of light, but interactive data nodes with the ability to provide real-time inf ormation back to city hall and emergency responders, as well as services to local residents. Smart street lights could monitor traf f ic f low, remotely get brighter or dimmer in support of f irst responders during an emergency, read utility meters f rom nearby houses, serve as Wi-Fi hot spots, and more. If all this sounds a little f uturistic, consider that the U.S. may already be late coming to the game. Last month, smart grid technology f irm Silver Spring Networks and French lighting company Citelum announced a project in Copenhagen to convert 20,000 streetlights to LEDs, while also building a networked platf orm f or other services, which may include wireless service, traf f ic signal controls, automated parking meters, and other smart city services. Meanwhile, Christchurch, New Z ealand, which suf f ered a devastating earthquake that leveled its downtown, is leveraging 12 percent of the $30 billion reconstruction f undin partnership with MIT and prominent technology and analytic sof tware companiestoward the establishment of a network of sensors and smart technology (some atop streetlights, others buried underground) that will monitor air quality, seismic activity, transit f low, pedestrian f low, and building ef f iciency.

A BUSINESS MODEL BETTER SUITED TO SILICON VALLEY?

With all these savings and opportunities, why has conversion to LED street lighting not taken place f aster? T he initial capital cost of LED f ixtures is one reason. LEDs can cost several times that of traditional bulb technology, though prices are dropping rapidly with continuing strides in the ef f iciency of the LEDs themselves, better manuf acturing techniques, and increased competition. For example, the City of Asheville, NC, completed the third phase of a three-year conversion of 8,000 streetlights in 2013. Between phases 1 and 3, the cost of their most expensive LED f ixtures dropped f rom $765 to $472. But even considering the plummeting cost, a f ull change-out of a streetlight system demands a substantial capital investment f or either a utility or a community. Plus, with this technology advancing so rapidly, communities are potentially f aced with making a 20-year investment in electronics that could be comparatively obsolete within 5 years. T hese are timetables f ar more f amiliar to IT companies and Silicon Valley than to utilities. What was once a static service with slowly changing technology is rapidly adjusting to the hyperactive world of silicon-based electronics. Communities are seeing the benef its, while technology and lighting companies are experimenting with new business models, perf ormance contracting, and lease arrangements. T his all raises a f undamental question: Why should this service continue to be included in the package of regulated services provided by the electric utility? One disruptive scenario might see street lighting disappear entirely f rom the set of electricity services provided by the utilities. Municipalities might take lighting on themselves. Or, more likely, telecom or technology companies could move into this once sleepy market, just as Silver Spring has done in Copenhagen. For example, it is not dif f icult to imagine Google making the leap f rom running f iber throughout cities to connecting sensors and control technology with that network and providing street lighting as they go. Or Cisco, which owns most of the patents f or IP telephony, could decide to make a run at the mobile phone market with a f inegrain Wi-Fi network built into what were previously only lights on a pole. Under these scenarios, utilities would lose a reliable, likely high-margin business segmentpotentially leading to a new slate of rate cases as they are f orced to balance lost revenues across other customer segments.

Alternatively, the f uture might not be so disruptive f or utilities if street lighting became an unregulated prof it center, as has occurred in the State of Georgia. In that case, the utilities need only pivot to develop their expertise and partner with other companies to build and maintain networks of these devices on their existing pole inf rastructure. T his can open new unregulated revenue streams f or both the utility and f or municipalities f rom third-party users, expand municipal services available to citizens, improve lighting, and, with it, saf ety and aesthetics. All of this can exist in a competitive environment that does not restrict prof itability, but still assures the lowest cost to the consumer and provides an incentive f or continuous innovation. Whatever the ownership model, a f irst step is to better align incentives around energy ef f iciency and electricity providers cost recovery mechanisms. T hat has been the lesson f rom Vermont, and strong ef f iciency mandates in Massachusetts have likewise supported the major LED rollout in Boston. In places where electricity is provided by a municipal utility such as Los Angeles, these incentives are already well aligned and change is taking place. It remains to be seen, however, if these cost- and ef f iciency-driven programs are also positioned to make the leap to the more expansive service potential that LED technology enables. It may be too early to know what this will represent f or the utilities, but its certain that there is plenty of pressure f rom all levels of government and f rom technology companies to drive change sooner than later. With every passing year, the technology improves, costs go down, and potential savings grow. T he question then becomes, who is best positioned to seize this opportunity? Guest co-author Dan Howe is the assistant city manager for the City of Raleigh, NC, and a member of RMIs eLab.

Source: Rocky Mountain Institute. Reproduced with permission.