Corporate Report. Report from Transportation and Environmental Services, Operations. Date of Report: April 2, 2015 Date of Meeting: April 13, 2015

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1 Corporate Report Report from Transportation and Environmental Services, Operations Date of Report: April 2, 2015 Date of Meeting: April 13, 2015 Report Number: TES File: Subject: LED Street Light Conversion Business Case Recommendation That the Director of Transportation and Environmental Services be authorized to proceed with tendering for the City Wide Retrofit of approximately 14,300 high pressure sodium (HPS) street lights with light emitting diode (LED) street lights; and That the Director of Transportation and Environmental Services be authorized to apply for the Independent Electricity System Operator (IESO) saveonenergy RETROFIT Program incentive and that all rebates received, for converting to LED, be applied to the capital cost of the project; and That the capital cost of approximately $5,900,000 for the additional funding required beyond the rebates be funded by the Federal Gas Tax Program over four years. FORTHWITH Summary This report outlines the business case for a City Wide LED Streetlight Retrofit Program, which specifically targets the City's high pressure sodium "cobra head" street lights. A conversion to LED technology will reduce energy demand and street light maintenance costs, improve lighting quality and provide environmental benefits. The City will require approximately $5,900,000 in funding internally to make this project proceed and the Federal Gas Tax has been identified by City staff as the recommended funding source as it produces the best overall value saving the City approximately $475,000 in interest charges. A summary of the financing is as follows: Estimated Project Cost to install 14,300 LED street lights $7,000,000 Anticipated IESO saveonenergy incentive program $1,100,000 Balance to be paid from Federal Gas Tax $5,900,000 Anticipated Energy Cost Avoidance (annual) $720,000 Anticipated Maintenance Cost Avoidance (annual) $350,000 Simple Payback in Operating Cost Avoidance (using Federal Gas Tax 6 yrs funding) Report Page 1 of 6

2 Rate of Return (using Federal Gas Tax funding) 30% Simple Payback in Operating Cost Avoidance (using a debt based 6 yrs funding source) Rate of Return (using a debt based funding source) 26% A four year implementation program is recommended with installations beginning in the summer of 2015 and completed by the end of Phasing the conversion over four years will spread out the cost, ease the logistics associated with the installation of new fixtures, coincide with the City s street light re-lamping program, as well as benefit future replacement programs by helping limit the number of fixtures that may fail in any one year. If approved by Council, staff will commence the tender process and will apply for IESO saveonenergy RETROFIT Program incentive. Background At the September 22, 2014 City Council meeting, Councillor Williamson requested the following: Motion on LED lighting - Staff report which will provide a business case for implementation of energy efficient lights, citywide, which details the associated costs as well as the expected rate of return This is in addition to an earlier request from Councillor Siscoe requesting the following: Report which will provide a business case for potential implementation of LED lights, city wide, which details the associated costs of such a program as well as the expected rate of return; that staff determine if there are any potential partnerships or incentives which may assist with the implementation of a citywide LED lights program The following report will address these requests of Council Report The City s streetlight system is comprised of approximately 15,300 lights, which consumes approximately 10,000 megawatts of power annually at a cost of $1.8 million. When combined with the $700,000 the City spends annually to maintain the system, the cost of the streetlight system approaches $2.5 million per year. As energy and maintenance costs will continue to rise, the financial burden of the streetlight system will grow. Facing similar challenges, other municipalities are considering converting from existing HPS streetlights to new lighting technologies. While other high-efficiency lighting options exist, the use of LED technology has rapidly become the preferred alternative in the streetlight industry. A conversion to LED technology will reduce energy demand and street light maintenance costs, while improving lighting quality. LED streetlights have been shown to reduce annual energy and maintenance costs by as much as 60%. Report Page 2 of 6

3 LED s also direct light to where it is needed, thereby avoiding dark spots and light wastage like that of HPS, and have more accurate colour rendering allowing colors to seem more natural. LED lamps can last up to five times longer than the conventional HPS lamps the City currently uses. In addition, there is a significant environmental benefit due to reduced energy consumption, which relates to reduced power production, and the fact that LED s don t contain mercury like HPS bulbs so there is no associated hazardous material designation which requires special disposal measures. While LED technology has many benefits, the cost to install such a system is significant. Most municipal LED early adopters have focused initially on cobra head fixtures (the City's most common street light). This is because the LED decorative fixtures and post top fixtures are 2 to 4 times the cost of a LED cobra head and cobra heads generally are the higher wattage fixtures thereby resulting in the greatest energy savings and incentives. Staff is therefore planning to initially focus on replacing cobra head fixtures with decorative and post top lighting being converted at a later date once a retrofit solution is determined and further technological improvements are made. Given the logistical requirements and cost associated with converting the City's 14,300 cobra head street lights, a four year conversion strategy is recommend with installations beginning July 2015 and completed by the end of 2018, details provided below. Anticipated Project Timelines: Council Approval of Business Case - April 13, 2015 Tender Issued May 6, 2015 Tender Closing May 27, 2015 Contract Issued June 23, 2015 Start of Year 1 LED Conversion (Re-lamping Area street lights) - July 1, 2015 Start of Year 2 LED Conversion (Re-lamping Area street lights) - July 1, 2016 Start of Year 3 LED Conversion (Re-lamping Area street lights) - July 1, 2017 Start of Year 4 LED Conversion (Re-lamping Area street lights) - July 1, 2018 Project Completion - December 31, 2018 Phasing the conversion over four years will coincide with the City s current street light re-lamping program and will benefit future replacement programs by limiting the number of fixtures that may fail in any one year. A map showing the conversion areas by year is included in Appendix 1. Financial Implications Although it may appear on the surface that a conversion to LED technology could save the City approximately $1.5 million per year ($2.5 million per year in energy and maintenance costs multiplied by the 60% potential cost avoidance) this is overstated due to the fixed and variable nature of the energy costs as well as the suitability of the City s streetlight inventory for conversion. The City s street lighting energy bill is comprised of both variable and fixed costs. Only the variable component of the bill, which represents approximately 70%, is impacted by Report Page 3 of 6

4 reductions in consumption and demand. In addition, of the 15,300 streetlights in the City s inventory, approximately 14,300 are conventional cobrahead lights, which are easily adaptable to LED technology. These lights represent 93% of the inventory and approximately 95% of the demand. The remaining lights are primarily decorative or post top mounted lights, which are not included as part of this phase of the LED conversion program. As a result, staff estimate energy cost avoidance at approximately 40% of the city's current total streetlight energy costs a year, upon completion of the conversion, for the purposes of this business case. Annual maintenance cost avoidance are anticipated to be an average of approximately 50% a year due to the warranty and expected lifespan of LED lights. With these assumptions and adjusted rates factored in, once completed, a conversion to LED technology could save the City approximately $1,070,000 per year in operating costs ($720,000 energy cost avoidance and $350,000 maintenance cost avoidance). Using recent cost estimates, the anticipated cost to convert the 14,300 HPS cobraheads to LED technology is estimated at $7,000,000. The current IESO (Independent Electricity System Operator) incentive program has available street lighting rebates for conversion from HPS lighting to LED lighting completed through The current incentives (updated December 16, 2014) are expected to carry though to As a result of the high number of municipalities expected to take advantage of these incentives, there is no indication that the program will continue beyond 2020 and therefore the City's conversion program should be completed by the end of 2019 in order to obtain these incentives. Based on the current rebates the City's LED conversion rebate is calculated to be $1,100,000. This results in the remaining $5,900,000 requiring internal funding to proceed with the conversion. Federal Gas Tax has been identified as a viable internal funding source, which will negate the need to pay interest on the funding used, like other debt based funding strategies. Based on these assumptions, three financial scenarios were explored to determine the best value of a four year conversion. Scenario 1: Federal Gas Tax financing The first scenario used Federal Gas Tax funding which produced a 30% return and a six year payback period. In this scenario all cost avoidance or savings are passed on to the taxpayer. Scenario 2: Debt financing The second scenario used debt financing and assumed an average interest rate of approximately 2.75% over 5 years which produced a 26% return over 20 years and a six year payback period. In this scenario cost avoidance to the tax payer was reduced to pay for interest expenses. Scenario 3: Specialized financing The last scenario explored specialized financing programs which pay for the upfront capital costs using a portion of the operating savings. These programs were assessed as having a lower rate of return in comparison to scenario 1 and 2 due to the share of Report Page 4 of 6

5 savings being split between the tax payer, interest expenses and the program provider expenses. Staff are therefore recommending funding the conversion using the Federal Gas Tax funding as it produces the best overall value with a rate of return of 30% over 20 years and providers the taxpayer with the maximum benefit, as illustrated in Figures 1 and 2. Chart of the total annual estimated costs of converting to LED lights using scenario 1. Figure 1 Estimated Total Cost Using Federal Gas Tax Funding Illustration of how the benefits of converting to LED lights are shared between the three different scenarios. Figure 2 Portion of Cost Avoidance to the Taxpayer Report Page 5 of 6

6 Staff has included $2.0 million in the 2015 Capital Budget using Gas Tax Funding, subject to budget approval, leaving $1.3 million a year to be funded through Gas Tax for the remaining three years (2016, 2017 and 2018). Conclusion Based on the research and analysis performed by staff, there are significant benefits to implementing LED streetlight technology, including energy and maintenance cost avoidance (estimated at $1,070,000 a year), improved lighting quality and environmental benefits. The capital cost to convert the 14,300 high pressure sodium cobrahead street lights is estimated at $7,000,000. Of which, staff anticipate $1,100,000 will be covered by the IESO incentives, leaving $5,900,000 to be funded internally. A four year implementation program funded through the Federal Gas Tax is recommended resulting in an estimated "pay-back" within six years and a rate of return of 30% over the 20 year life expectancy of the LED streetlights. Subject to Council approval, a tender will be issued for the supply and installation of new LED streetlights and an application will be submitted for the IESO saveonenergy RETROFIT Program incentive. Notification It is in order to notify Mr. Max Cananzi, President and CEO, Horizon Energy Solutions Inc., 55 John Street North, Hamilton, ON, L8R 3M8. Prepared and Submitted by: Chris Day, C.E.T. Manager of Transportation Services Approved by: Dan Dillon, P. Eng. Director of Transportation and Environmental Services Report Page 6 of 6

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