Are you sure that today´s state-of-the-art technology will be competitive in a few years?
From «ESCOs, Myth and Reality» Ribes&Casado
The continuous progress of technology gives us another evidence of the virtual character of the ESCO Business model post-contract gains.
Energy-saving is a relative concept. It is accepted that it is the difference between the current consumption and the former consumption of the pre-contract period. In the short/medium term, it is a reasonable way of measuring the improvements and advantages of the new system, but the reasonability of this concept is decreased as the considered term is increased.
Is it realistic to think that we are saving energy because our current incandescent lighting system is better than the former one installed during the fifties? The answer is no. The comparison between technologies is only honest when they are produced inside the same temporal context.
What happens if along the useful life of our current system emerges a brand new technology more efficient and we persist on the imperfect idea of “energy-saving” without any other consideration?
The answer is that we are supposing gains that are absolutely unreal because actually, our technology became obsolete. The reference inefficiency matters must be updated.
Making the right decision. Two learnings.
In January 2013, six months ago, a hotel manager has upgraded the incandescent indoor illumination system of the building with a brand new CFL –compact fluorescent lamp- low consumption technology.
The benefit is immediate, the monthly cost of the hotel´s traditional 5,000 light bulbs was 5,689 USD –including purchase price, installation work, and consumption-, while the monthly cost of the new CFL system is 1,915 USD. This is a monthly saving of 3,774 USD. Obviously a good business.
But now, six months after the retrofit, the manager receives a new offer of a better LED technology whose monthly cost is only 1,511 USD. The illumination characteristics of the three technologies are equivalent to the incandescent 60 watts bulbs with a warm white (2,700k) light range. In this case, CFL and LED bulbs are high-quality made.
Doubt is here. Does a new retrofit suppose any benefit right now? Let´s analyze this issue.
| Concept | Incandescent | CFL | LED |
|---|---|---|---|
| Units | 5,000 | 5,000 | 5.000 |
| Watts | 60 | 14 | 10 |
| Useful life (hours) | 1,200 | 7,700 | 25,000 |
| Useful life (months) | 9 | 57 | 185 |
| Unit price (USD) | 0.70 | 8.00 | 25.00 |
| Purchase cost | 3,500 | 40,000 | 125,000 |
| Installation work cost | 4,500 | 4,500 | 4,500 |
| (1) Retrofit total cost | 8,000 | 44,500 | 129,500 |
| kWh cost (USD) | 0.12 | 0.12 | 0.12 |
| (2) Useful life consumption total cost | 43,200 | 64,680 | 150,000 |
| Total cost (1+2) | 51,200 | 109,180 | 279,500 |
| Monthly total cost | 5,689 | 1,915 | 1,511 |
Apparently, LED technology supposes each month an advantage of 404 USD with respect to the CFL, but this is only true when we compare a simultaneous retrofit of both technologies. Chronologically it is not our case.
In our case, the CFL retrofit purchase and installation payment of 44,500 USD has been done six months ago. So, if the retrofit useful life is 57 months, the conclusion is that for the next 51 months we only have to pay the illumination consumption. Which is strictly the monthly consumption?
| Concept | Incandescent | CFL | LED |
|---|---|---|---|
| Monthly consumption cost | 4,800 | 1,135 | 811 |
Learning 1: During the next 51 months, the right comparison is CFL 1,135 USD vs LED 1,511 USD. No doubt, the smart decision is to wait 51 months until the CFL system useful life ends and then to implement the LEDs.
Furthermore, in the next years, LED technology will mature very positively in all parameters: price, useful life, and saving performance. It is perfectly foreseeable prices of 15 USD/unit for 6 watts high-quality bulbs with a useful life of 40,000 hours; in fact, the Swedish IKEA is currently offering in Europe low-cost LED bulbs with these characteristics. This future data will mean in the hotel case a monthly total cost of only 755 USD –around 50% of the present case-.
This evolution shows us another learning. Someone could think, in business terms, that six months ago the hotel manager was wrong because then the LED already was better than the CFL one; evidently, always is better to pay 1,511 USD each month than 1,915 USD. But that decision was absolutely right because in the LED 1.511 USD cost there is a hidden condition: the duty of maintaining the system for 185 months.
Seeing the LED technology maturation process –a few years ago the price was around 100 USD/unit- it is obvious that the 2013 products will probably become obsolete in 2018. So, it is easy to see that:
- January 2013 CFL solution was the best one because having a satisfactory performance, permits in only 57 months to be refreshed by a better one –post 2018 LED-.
- January 2013 LED solution was not the best one because its high purchase price requires of 185 months to achieve enough good savings, what means a long payback. This fact obstructs any possibility of refreshment during a long term. In our example, it means wasting money when a more mature LED technology will be accessible –supposedly in 2018-.
Learning 2: Immature state-of-the-art technologies are not competitive compared with their own future development. When long paybacks are required, to purchase new devices it is better to wait for the arrival of mature products with better price and technological performance.