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An investment proposal

March 13, 2012

First, credit where credit is due. I read Mike the Mad Biologist. His post pointed me here, which mentioned an atrociously written Washington Post article (bad arithmetic, erased without comment, then corrected, with no reflection of the vastly different results in the text). This got me to think about buying efficient light bulbs as an investment, and so I did some interest calculations, as if the bulb were paying a mortgage.

I’ve long been interested in LED lighting, and have installed some myself in places where it was a clear win (underneath cabinets and on bicycles). I’ve been wary of “LED light bulbs” for some time, because to be fair, diplomatic, and objective, up till now, most of them have been overpriced crap. But last weekend or so, I was at the Home Despot, saw some LED light bulbs, read the labels, decided that it was worth my while to try one of them. I got a 14 watt bulb claiming to be the equivalent of a 75W bulb, installed it, and so far, so good — it’s bright, good color temperature, and instant-on, as expected. Lifetime is TBD; claims to have a 5 year warranty (but did I save the receipt? Whoops, need to remember to do that when I buy more), also claims to have a 25000 hour life, which is reasonable for LEDs. Also claims to be dimmable, but the reviews consistently say “no, not really, not like you’d expect”.

So, if I view this bulb as an investment, what is the rate of return? Let’s benchmark it against an incandescent bulb, since that is what the Post did. I initially decided to assume that I was saving 60 watts per bulb (15 instead of 75), running it 6 hours a day, and paying $.12/kwh for electricity (actually, I pay $.15, I just checked last month’s bill). Electricity savings come to about $1.30 per month.

Assume, also, that an incandescent bulb costs a dollar, and has a lifetime of 1500, so include the cost of the bulb in each month’s savings. At 6 hours per day, the bulb savings are 12 cents per month. Total savings are $1.42/month.

Assume the bulb will last 10 years (21600 hours at 6/day). I paid $30 for the bulb, plus sales tax, rounded up, is $32.

So, supposing I made an investment of $32, and it paid me back $1.42 per month for 120 months, at which point, no more payments, just as if I were loaning money to someone else for an itty-bitty mortgage. Spreadsheets have a “RATE” function that will determine the interest rate given a present value, future value, payment amount, and number of payments; in this case, -32, 0, 1.42, and 120. And out pops 4.4 percent. Not very exciting, though it helps that it is free of taxes, since it is money saved, not money earned. And if you only ran a bulb 3 hours a day, and only saved 45 watts, and only paid $.10 per killowatt hour, only 1.2%. That’s not much of an investment, is it?

But those interest rates are PER MONTH, not per year. So really, 1.2% — that’s 14.4% return, per year, tax free. If you return to the original assumptions, the $32 investment in an LED light bulb pays out at 52.8% per year.

What’s the risk in this investment? I see three possible risks that could cause it to fail to pay out.

First, you can only save money that you have; if you go bankrupt, then it’s not interesting that you aren’t paying money to the electric company, because you’re already not paying money to the electric company. However, all investments are vulnerable to bankruptcy risk.

Second, electricity in the next few years could become incredibly cheap (pigs could fly, too).

Third, the bulb could fail. Obviously, it pays to save your receipt; that gives you insurance of some sort for up to 5 years. If the bulb fails in five years instead of lasting ten, then the payout is not as impressive. If electricity is too cheap, or if you don’t run the bulb enough hours per day, it won’t pay out (3 hours per day, $.10/kwh, 45 watt savings, 5 years, will not pay off). But, if a bulb is on even 4 hours a day at $.10/kWH, the interest rate is 7.4%, or 3 hours at $.12/kWH, is 5%. Where I live with $.15/kWH electricity, 3 hours a day, 45 watts less, failing at 5 years, pays off at 14.8%. At 6 hours a day, 45.8%. I really like the idea of an investment that pays me 14.8% annual interest, tax-free, when it “fails”.

Did you notice that the Washington Post thought it was more important to tell you about the terrible government-subsidized light bulbs, when they could have been giving you this useful information instead? Says something about their priorities, doesn’t it? Hard to believe that anyone would think time spent reading that would be well-spent.

6 Responses to “An investment proposal”

  1. hotshoe Says:

    Thanks for working the figures. There are only five light bulbs in my house which are ever on as much, or more, than 3 hours a day. Each of those has already been replaced with a 14 or 20 watt fluorescent, so I won’t get any more savings with an LED. I’m not the person you need to convince …
    But I notice that these calculations are assuming that electricity will be constantly available, although not cheap. In the US we should also be considering that electricity may become sporadically available or rationed within the lifetime of these bulbs. You mentioned that one downside of “investing” in expensive bulbs now is that you cannot save money that you don’t have (and it does no good to go bankrupt with unused lightbulbs as “assets”). The converse of this is that it would do no good to have hoarded cash, or to have available credit, when the daily afternoon brownout hits your state for the third straight month, and you can’t buy energy-efficient lightbulbs because all the other consumers have emptied the shelves of them. Prudent consumers should buy them now, assuming they have a little cash cushion to do so, whether or not there’s an immediate payback.
    And of course, if all users in the first-world nations do completely switch to energy-efficient lighting, then we’ll be that much less likely to be hit with brownouts or rationing. So it’s a civic investment, if nothing else. Save some juice for your poor neighbor. The fact that the ReThuglicans are trying to gin up hatred against energy-efficient lightbulbs is just more evidence that they hate all American communities outside their gates.
    P.S. Cool that you got this idea from MiketheBiologist; I found this post of yours from a link on his blog, so he’s completing the circle.

    • dr2chase Says:

      You do point out an investment risk I had failed to consider — if there’s no electricity at all, you can’t save money by using less of it.

  2. Dan Wallach Says:

    A couple thoughts:

    – Incandescent bulbs put out heat, which you want to remove (at least in the summer). I haven’t been able to get straight numbers, but it seems that A/C takes roughly 30% of the electricity to move heat around (i.e., it takes 300W of A/C to remove 1000W of heat). Conversely, in the winter, you lack all that “free” heat and have to run your real heater. This makes LED lighting more attractive if you’ve somewhere warm.

    – LED lights have hypothetically enormous lifetimes, even relative to CFLs. This means that if you assign any sort of cost to installation, that’s additional savings from lack of changing bulbs around, lack of driving back and forth to the store, etc. If you blow 20 minutes to replace a bulb, and you could otherwise be billing yourself out at some astronomic rate per hour, the LED lights help you make money.

    – CFLs seem to have cheap crap power transformers. I’ve had many of them burn out on me after only modest amounts of service, and several more DOA. The actual number of CFLs to equal one LED light (assuming the LEDs are as good as they claim) is an interesting open question. Of course, LED lights will presumably also adopt cheap crap electronics to save cost, but then they only need basic step-down transformers and low-pass filters to get clean DC power, whereas CFLs need high-voltage.

    – CFLs have some sort of externality cost in terms of disposal (mercury being poisonous). I have no idea how to value that. LEDs are hypothetically safe to dump in a landfill.

    – The failure mode of CFLs is that they die immediately. The (alleged) failure mode of LEDs is that they get dimmer over time, so you can delay replacement until you’re annoyed at the dimness of your light. (We did have one LED fixture that went belly up early, apparently due to a crappy power supply. The manufacturer replaced it and the new one has gone along happily without trouble for a few years now.)

    So anyway, count me in as a fan of LED lighting.

    • dr2chase Says:

      I worry about the power supply also, since it appears that we have perfected the technology of arbitrarily cheap and sleazy electronics. The weak link appears to be electrolytic capacitors, and they are almost as vulnerable to heat as the LED itself. They seem to come with operational lifetimes typically rated at something like “2000 hours at 105C”, with the estimate that the lifetime doubles for every 10C lower. The reason to be slightly more optimistic about the LED supplies is that the LEDs themselves require a low temperature, and so the whole assembly is heat-sinked very well.

  3. Phil Miller Says:

    There’s one other risk: That LED’s will come down in price later, and that you paid a premium to become an early adopter of a technology that in 5 years will become cheap and pedestrian. LED’s are improving and scales of production are going up, so economy of scales will improve. Will that happen before your bulb is exhausted? And if so how much more did you pay?

    • dr2chase Says:

      As the price of LEDs come down, they are cost-effective for sockets that are used less. Say you’re paying $.15/kWH, replacing a bulb with one using 45W less, on 5 hours per day. Delaying the bulb purchase costs you over $1 per month. If the new bulbs are not getting cheaper at that rate, then there’s no risk. For a 5 year time frame, for the assumptions here, it’s safe to buy any LED bulb costing less than $60. And if you don’t like my assumptions, only replace bulbs now that are on even more hours per day — if it’s 8 hours, then the savings per month are almost $1.80.


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