What’s to think about?
Faced with a combination of soaring energy costs and an economic downturn, many building operators find themselves in the invidious position of needing to reduce energy consumption but not having the capital to fund it – or, perhaps, not having the confidence to release the capital.
As a result, many energy saving projects are not getting beyond the ‘wouldn’t it be a good idea’ phase in the current economic climate – which doesn’t help the building operator in the longer term and certainly doesn’t help the building services industry.
One alternative, which might be considered an ideal scenario for funding lighting upgrades, is to fund the capital costs through the energy savings achieved. This is a concept that has been around in the form of contract energy management for heating systems for a long time, but it isn’t so easy to apply to lighting. This is because it’s relatively easy to meter the heat used at the supply pipe and agree a pre-agreed cost per kilowatt supplied. In contrast, with lighting there are so many circuits involved that measurement becomes more complex and costly.
However, there are ways of applying these same principles to lighting within a relatively short timescale and with a high degree of transparency – by basing before and after comparisons on reductions in installed electrical load and additional controls savings. As such, these schemes can enable the building operator to take advantage of energy saving technologies and can help specifiers provide a viable solution. The purpose of this article is to explain how such schemes work and why they really aren’t too good to be true.
In order to illustrate the principles and benefits, we can consider the figures underlying a real project that our company is currently undertaking. It involves the removal of a number of low bay fittings, using various high intensity discharge (HID) lamps, and replacing them with high output, ultra long life fluorescent T5 fittings. Additional lighting controls are also being installed as the existing lighting was simply switched on or off, with no daylight linking or occupancy control.
The project has been procured under a three year ‘Pay As You Save’ (PAYS) arrangement. However, in some cases there may be advantages to a seven year contract, as this will enable the building operator to qualify for Enhanced Capital Allowances on the new, energy-efficient equipment. This will be discussed in more detail later.
In the project concerned, it was decided the most meaningful way of measuring savings would be to base them on the reduction in the installed electrical load. In this way, there could be no confusion arising from future changes in occupancy patterns. In addition, a further conservative element has been included to account for any savings achieved through improved control. The lamp wattages shown include ballast losses.
In total, 650 2x91W, 120 720W and 36 130W lamps have been replaced with 420 2x54W, 120 4x54W and 36 2x28W lamps respectively. Rounded down, this provides a reduction in installed electrical load of 136kWh.
As this is a 24 hour operation, the maximum running hours are based on the lights being on all the time, 364 days of the year, or 8736 hours per annum, With improved control in relation to daylight and occupancy, this maximum is predicted to fall to 5242 hours per lamp per annum, while the building’s occupancy remains unchanged.
This, combined with the reduced electrical load, equates to a reduction in annual consumption of 1,444,956kWh, from 1829144kWh to 384188kWh. Basing electricity costs on 5.811p per unit including the Climate Change Levy, replacement of the lighting achieves savings in electricity costs of £83,966 per annum.
In addition, maintenance of the existing lighting was costing a further £9264 per annum. The new lighting, which is guaranteed under the PAYS contract, uses ultra long life T5 lamps to provide a life of seven years with the current running hours, so there is a further saving of £9264 per annum – giving a total annual saving of £93,230 (£83,966 + £9,264), or £23,307 per quarter.
So this forms the basis for calculating the PAYS payments, which are made on a quarterly basis in arrears. In this case, the quarterly payments were set at £20,000.
In the first quarter, when the work was being carried out, it’s reasonable to assume that only half the energy savings were achieved – but there was no PAYS payment, so the savings for this first quarter are half of the predicted quarterly savings of £23,307 =.£11,653.
Subsequent quarterly savings are based on this £23,307 figure, less the £20,000 quarterly payment = £3,307 per quarter for the next 12 quarters, adding another £39,684 worth of savings to the £11,653 saved in the first quarter.
The overall saving for the three year period following installation, therefore, is £51,337 without any capital outlay by the building operator. Once the 12 PAYS payments have been made, there are further annual savings for at least another four years before the lamps need to be replaced. This will be for the full £93,230 per annum, adding a further £372,920 to the first three years’ savings, resulting in a total saving of £424,257 over seven years.
After this seven year period, some re-lamping costs would be incurred but the annual energy savings would be maintained for the life of the luminaires. In addition, it’s worth bearing in mind that these calculations are based on current electricity costs and the payments remain unchanged. As energy prices increase, therefore, the differential between the savings and the quarterly PAYS payments increases so the real savings are greater than indicated here.
Of course, the same energy savings would have been achieved using conventional procurement. The big difference is that the building operator would have been required to pay out £191,500 for the new lighting equipment, which still results in a healthy payback of 2.1 years – or less as energy prices increase. However, not having to find the capital in the first place can make a big difference to whether this type of project goes ahead or not.
As noted earlier, the seven years considered here have significance other than the projected life of the lamps. In any such contract there is the question of who is eligible for the Enhanced Capital Allowances (ECAs) for energy-saving products that are included on the Carbon Trust’s Energy Technology List.
In the case of a contract that lasts less than seven years, this is classified as a leasing arrangement and the supplier of the fittings is eligible for the ECAs. However, if the contract is seven years or more, the building operator is eligible for the ECAs, enabling the capital allowances on the new equipment to be claimed in the first year rather than being amortised over several years. Thus, it can be beneficial to structure the contract to extend for seven years, rather than the three years illustrated here.
A further benefit of matching the contract length to lamp life is that lamp disposal in compliance with the WEEE Directive is included in the contract.
From this illustration, therefore, it’s clear that the concept of paying for upgrades through savings can offer real value to the building operator. All it takes is an open mind, unclouded by preconceptions, and a willingness to consider an innovative approach.