Calculating Return on Investment for Lighting Projects

Within this feature we’ll walk you through the simple calculations that will help you prove that the money spent on a lighting retrofit is money well spent.

Before we begin, there are a couple of pieces of information that you’ll want to gather in order to plug into the ROI formulas below.  These are the following:

• Total number of existing fixtures.
• Total system Watts for the existing and new fixtures. Most of the fixtures on our website include the system wattage you can use for the new fixture section of the formula.
• Operating hours per year. This is simply the total number of hours the lights are on during one year.  This can be calculated by taking the Work hours per day and multiplying by work days per year.  If the lights are never turned off and operate 24 hours per day for 365 days per year, the burn hours would be 8,760 hours per year.
• Cost of Electricity per kilowatt-hour (kWh). Electric bills aren’t the easiest things to decode.  Some have multiple per-kWh charges in addition to peak and demand charges. The easiest thing to do is to total all of the per-kWh charges and divide by the total kWh consumed.  You can also back out any fixed lease charges (outdoor lighting, for example) and divide that number by the kWh consumed.

With these values in hand, it’s time to calculate the annual savings from a lighting project and get to the return on investment and simple payback formulas.

Calculating Annual Savings for Lighting

The first part of calculating the ROI is to figure out how much the new lights would save us in a single year.  This can be done by plugging the values above into the formula below:

Annual Savings =  # of Fixtures  X  Burn Hours per year  X  kWh Rate  X  (  (Existing fixture system wattage — New Fixture System Wattage)  /  1000 )

Lighting Return on Investment

The Return on Investment calculation for a lighting project provides a way of measuring the amount of benefit the organization will receive from the new lighting project relevant to the amount of investment that is needed in order to purchase and install the new lights.  The ROI is typically displayed as a percentage and you can easily think of it as the percentage of the investment that the project will return in profit over one year.  Any utility rebates, or other State and Federal incentives that may be available, could significantly improve the outcome of the return on investment calculation.

ROI (%) = (  Annual Savings  +  Total Rebates  )  /  ( # of Fixtures  X  Installed Cost per Fixture  ) * 100

Return on investment may also be expressed in pounds.  This is typically done when looking at the ROI over a certain period of time.  If your organisation prefers this method, it would typically define how long the ROI period should be.

ROI (£) = (  # of Years in Period  X  Annual Savings  )  +  Total Rebates  —  ( # of Fixtures  X  Installed Cost per Fixture  )

Lighting Payback Period Calculation

The payback period is the amount of time it would take for the new lighting project to generate enough savings to make up for the investment required to complete the project.  After this point, all of the savings that the project generate go straight to the bottom line for the company and can be used to fund other initiatives.

Payback Period (Years)  =  (  # of Fixtures  X  Installed Cost per Fixture  )  / Annual Savings