Understanding Utility Streetlight Economics: Challenges of Rate Design and Stranded Costs

Many Granite State municipalities are cutting energy costs by converting their building- and street-lighting to LEDs. However, utility streetlight tariffs can be complex, and the economic incentive to reduce streetlight energy consumption with LEDs is not always clear. This article will shed light on the types of streetlight tariffs and why some provide greater economic motivation than others for converting to LEDs.
 
There are two main issues affecting the economics of LED streetlight conversions:
 

1. Rate (Tariff) Design: Tariffs with high fixed charges per streetlight and low variable charges for energy consumption fail to translate energy savings into cost savings. Such tariff designs diminish the economic viability of LED conversions.
2. Stranded Costs: Utilities may charge municipalities for the stranded costs (also referred to as undepreciated asset value or net book value) of legacy streetlights being converted to LEDs. The calculated stranded cost can be prohibitively expensive.

 
1. Rate (Tariff) Design
 
Table 1.1 simplifies three examples of streetlight tariffs:
 

1. Eversource streetlight tariff prior to 2013 revision.
2. Eversource streetlight tariff following 2013 revision.
3. Unitil current streetlight tariff.

The old Eversource tariff (row 1) was heavily weighted towards the fixed per light fixture charge (column A), while giving little weight to the variable amount of energy (kWh) consumed by that fixture (columns B and C). Under the old Eversource tariff, the monthly $0.42 per light cost associated with energy consumption (column C) represented about 5% of the total cost (column D). The other 95% of the total cost ($8.50 per month cost) was fixed, regardless of whether a town had LEDs or legacy light fixtures. Because so little weight was given to the energy charge, and so much of the cost remained fixed regardless of technology, the old tariff failed to translate energy savings into lower bills for municipalities.
 
In 2013, Eversource revised its streetlight tariff to better reflect the value of efficiency and LED conversions. The new Eversource tariff (row 2) is more balanced:
 

• The company lowered the fixed per light fixture charge from $8.50 to $3.30
• The company raised the energy charge from 1.4 cents/kWh to 5 cents/kWh.
• The monthly cost associated with energy consumption is up from 5% to 31% of total cost

 
The new tariff does a better job of translating energy savings into cost savings, as illustrated by the recent example from the City of Rochester shown in Table 1.2. Rochester was able to reduce streetlight energy consumption by 58% with an LED conversion, which translates into a 45% reduction in bills.

Unitil’s current tariff (Table 1.1, row 3) remains heavily weighted towards fixed costs while assigning little weight to the amount of energy consumed by a streetlight. Table 1.3 illustrates an example of the failure of the existing tariff to translate energy savings into cost savings. While an LED conversion is projected to reduce Plaistow streetlight energy consumption by 76%, the conversion would only reduce energy bills by 24%. This is because the tariff is skewed towards fixed costs and away from variable energy charges.

2. Stranded Costs (Undepreciated Asset Value/Net Book Value)
 
In addition to the cost of new LED fixtures, municipalities may be expected to pay their utility for the stranded costs of the utility-owned fixtures being replaced. The utility-calculated stranded costs, also referred to as undepreciated asset value or net book value, of legacy lights may be significantly greater than the market value of the lights.
 
In the competitive market, an LED conversion for a town with 435 lights can cost roughly $100,000 ($230/light). This $230 per light may include the recycling and disposal of old fixtures, installation of new fixtures, GIS mapping capabilities, wireless smart controls that allow for dimming, and more.
 
In addition to the $100,000 market value of the LED conversion, the town may be expected to pay its utility for the stranded cost of the legacy light fixtures. Utilities may calculate this stranded cost to be equal to or greater than the market value of the new fixtures (i.e., $230/light). In addition to the all-inclusive $100,000 market value of new streetlights, a town may be expected to pay its utility an additional $100,000, which the company calculates to be the remaining value of the legacy fixtures.
 
The addition of stranded costs can extend a lighting conversion project’s payback period from an average of less than 2 years to as much as 12 years.
 
In summary, savings from LED streetlight conversions can be substantial. For example, under the new Eversource tariff, the City of Manchester reduced energy bills by $500,000 per year by converting its 1,400 streetlights to LEDs. However, outdated tariffs and complications associated with stranded costs can make LED conversions challenging in certain utility service territories.
 
** Note: Operation and Maintenance costs are another contributing factor to the economics of streetlight conversions. LED conversions vastly reduce streetlight maintenance costs. LEDs last ten to twenty years, whereas their legacy counterparts require blub replacements every two to five years. In addition to (1) the balance between fixed and variable charges; and (2) the stranded costs; operation and maintenance charges are another important component factoring into the economics of streetlight conversions. **
 
** Note: Streetlight energy metering, or the lack thereof, is another complicating factor. Streetlight energy consumption is not metered; utilities instead calculate energy consumption based on annual hours of darkness. New LED technologies may come with dimming capabilities (i.e., streetlights may be automated or controlled to operate at lower levels of output). While municipalities may use dimming capabilities to further reduce their energy consumption, because of the absence of metering, this reduction in consumption is not yet reflected in a reduction in bills. Utilities, towns, and regulators should explore options for addressing this limitation. **
 
** Note: Ownership of streetlights is yet another relevant issue. In many states, public utility corporations are obligated by statute to allow interested municipalities to purchase and acquire ownership of streetlight fixtures. In New Hampshire, utilities are under no such statutory obligation. **

[1] NHPUC. (2014). NHPUC DE 13-248, “Order No. 25,701, Order Approving Rate EOL and Settlement Agreement, August 4, 2014.” Retrieved from https://www.puc.nh.gov/regulatory/Docketbk/2013/13-248/ORDERS/13-248%202014-08-04%20ORDER%20NO%2025-701.PDF
[1] Unitil Energy Systems. (2017). Summary of Delivery Service Rates, Issued: July 25, 2017, Effective: August 1, 2017. Retrieved from: http://unitil.com/sites/default/files/SumofDel_8.1.17.pdf