What is the payback period and return on investment for LED Lighting?

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These are two of the most common things we hear when talking with new clients. Especially given we are talking about LED lighting.

“We don‘t have a payback or return on investment goal”
”What does return on investment mean for LED Lighting?”

For the most part this is because businesses:

  • buy new light fittings ad hoc and the
  • buy the cheapest fittings they can find
  • pay their electricity bills but have outsourced lighting maintenance to a 3rd party who are not concerned with lighting performance
  • don't know the potential savings a LED lighting upgrade can have
  • don't know that investment-grade LED light fittings are available

But Lighting accounts for around 18% of the total energy use in commercial buildings in Singapore.  So should we be thinking a little harder about a purchase which could have such an impact on our overheads?

This article will  will educate you on about ROI and payback and why you should invest in your light fittings and not buy them ad hoc.

At Centropi we design, manufacture and supply investment-grade LED light fittings. They are predominantly used in industrial, manufacturing, logistics and office spaces.

If you are looking for the lowest-cost supplier in Singapore, that is not us. However our aim is to provide you with clear, concise information to inform your buying decisions.

Help Me Decarbonise!

Can you set financial targets for investing in LED lighting?

The simple answer is yes. And you should. With the carbon tax in Singapore set to quintuple in the coming years, there are lighting options to reduce your carbon footprint and provide financial benefits to your business. It is possible to get a return on your investment with your next LED lighting purchase

Return On Investment (ROI)

The financially savvy will look at how they can make any purchase work for them. They may even have a specific ROI in mind, which will narrow the list of potential suppliers and products.

Return On Investment (ROI) is used flippantly and, in some cases, without a real understanding of what it means, especially when talking about the ROI of LED lighting, which is often bought with little to no thought of the bigger financial picture.

What does ROI mean?

Return on Investment measures how much money you get back compared to how much you put in. Imagine you invested $100 in something like a business or a project. After some time, your investment grows, and now it's worth $150. Your ROI would be 50% because you gained $50 on top of your initial $100. It helps you see if your investment was a good decision or not. The higher the ROI, the better the investment is doing.

How does it work for investment-grade LED Lighting?

Option 1 - Fittings purchased upfront

Your business may have money allocated for green investments and grants from the NEA. In this instance, an upfront purchase is sensible. So how do you calculate ROI? The predicted monthly energy bill savings will be divided by the upfront cost. You can reach out to us to work out your potential savings.

ROI = Monthly Energy Bill Savings($)/Upfront Cost($)

Depending on your existing light fittings, the return on investment could easily be double digits.

Option 2 - Fittings purchased via Light as a Service (LaaS)

With LaaS, your business will not pay anything upfront. So in this instance, we will use the monthly LaaS fee instead of the upfront purchase cost.

ROI = Monthly Energy Bill Savings($)/LaaS Fee($)

We have seen situations where investment-grade LED lighting delivered via a LaaS Model can provide more than 100% ROI from the first month.

Financial payback period

Like with ROI, some businesses might want to set a specific payback period goal for an investment. Again this instantly changes the purchase from ad hoc to an investment. So it is also useful to understand payback, which is the other specific financial goal that could be applied to a LED lighting Investment.

What is the payback period?

The financial payback period is a way to figure out how long it takes to get back the money you invested in something. Let's say you invested $500 in a project or a gadget. Each month, it makes you $50. To calculate the payback period, divide the initial $500 by the monthly profit ($50). It means it will take you ten months to return your $500 investment. After that, all the money you make is pure profit. The shorter the payback period, the faster you get your investment back.

How does it work for investment-grade LED Lighting?

Option 1 - Fittings purchased upfront

Like any upfront purchase, your new lighting will cost you a certain amount. If investment-grade LED lighting is selected, you will get immediate monthly savings. The size of the savings will determine your payback period.

Payback = Upfront Cost/Monthly Energy Bill Savings

If you are running non-LED lighting in your space, your payback period will be shorter than if you are using LED lighting. But there are still great gains even if you run inefficient LED lighting.

Option 2 - Fittings purchased via Light as a Service (LaaS)
Payback = LaaS Fee($)/Monthly Energy Bill Savings($)

There is no upfront cost with LaaS. So the monthly fee is used to determine payback.

The monthly savings achieved after installing investment—grade lighting will cover the monthly LaaS fee and provide energy bill savings. So your payback period is 0 months. When you do the above calculation, you should get a figure of less than 1.

The payback period for LaaS using investment-grade LED lighting is instant.

For businesses who cannot afford to purchase upfront but are looking to get instantly reduced energy bills and free up cash,, combining this is a great goal.

How to maximise ROI and Payback

It is also possible to supercharge your investments and maximise the ROI and reduce the payback period.

Here are 5 ways to avoid using or reduce the amount of your own money you use when investing in an LED Lighting upgrade.

5 Ways to fund your energy-efficiency projects

By using these methods you can achieve extraordinary ROI and even keep these investments Off-Balance-Sheet.

Ivan has an ROI calculator available please reach out to him to learn more.

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