Economics of LED/solid state lightbulbs

Widespread adoption of solid state lightbulbs in the consumer market won’t take place until prices of SSLs fall radically.

There are two standard solid state lightbulbs(SSLs):  7 watt units as bright as incandescent bulbs rated at 60 watts, and 13 watt units as bright as incandescent bulbs rated at 100 watts.

SSLs have declined in price to between $30 to $50 each as of 2010.  An SSL can be expected to last 25–30 years under normal use.    SSLs offer lifespans of roughly 30,000 hours, versus compact fluorescent lightbulbs(CFLs) of roughly 8,000 hours, and standard incandescents of roughly 1,000 hours.  The current price for SSLs is still exorbitant compared to the cost of incandescent and CFL lightbulbs.  This indicates that manufacturers are attempting to recover their capital costs very quickly, and will be a hindrance to widespread adoption of SSLs by consumers.

LED replacement has the potential to save 32.6 terawatt-hours of electricity in one year, enough to power the lights of 16.7 million U.S. households or 14.4% of the total number of households in the entire US.    This means that over the course of the LED life, replacing a 60 watt standard bulb could save a business or household $120 per lamp.  At a price of $50 per lamp, the lifetime electricity cost savings aren’t enough to make the purchase price economically sensible.  A simple NPV calculation assuming an 8% discount rate and electricity cost savings of $4.80 per year given the purchase price of $50 turns up negative.  A purchase price of $32 given the other parameters results in a break even calculation.

The production process of white LEDs is complex and many aspects have room for improvement. This means that the production price of volume products is still relatively high compared to traditional light sources. One critique of LED lighting describes the control circuits required with each unit:

“electronic bulbs–especially fluorescents–require a lot of resources to manufacture, and have a long and complex bill of materials (BOM): ICs, passive components, PCB, packaging, and more.”

The cost of these electronic components should be subject to the same economies of scale as any other electronic device; which means that as volume production ramps up the cost per unit will plummet.  Therefore SSL manufacturers should be able to bring down prices to the point where widespread adoption will take place, which will allow manufacturers to recover their capital costs.

Manufacturing facilities for incandescent lightbulbs have likely long since recovered their startup capital costs.  Therefore sales of incandescent bulbs is likely highly profitable for manufacturers, even at unit prices of fifty cents.  The long life of solid-state lighting products poses a problem for incandescent bulb makers whose current customers buy frequent replacements.  Every year more than 425 million 60-watt incandescent light bulbs are sold in the United States, representing approximately 50% of the domestic incandescent light bulb market.  Legally mandated phase outs of incandescent bulbs that will be occurring in the next few years around the world seems to be the best way to overcome the short term cost advantage of incandescents.

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