LED Adoption: The Rocky Path to a Long Awaited Tipping Point

Presidio Graduate School’s Macroeconomics course for Spring 2012, is authoring a series of articles. The articles on this “micro-blog” reflect reactions and thoughts on news items, economic theory, and other issues as they pertain to the concept of sustainability.  Follow along here.

By Danielle Ginach

The advantages of high brightness light emitting diodes (HBLED) are well known, however widespread adoption faces the long-standing obstacle of initial purchase price.

Compared with incandescent lighting, LED lighting delivers greater lumens per watt, provides greater efficiency and reduced heat, as well as greater resistance to shock and vibration that improves overall lifespan despite a greater first cost. Some advantages of brightness and ambiance can even have unforeseen positive consequences such as increased productivity and decreased error rates in the workplace. In grocery cases, LED case lighting boosted sales volume by 19% while using 40% less energy. (source: EEFG)

The advantages are clear and largely quantifiable, yet lower cost illumination has remained out of favor with most companies and consumers. The high initial cost of LED bulbs continues to serve as an obstacle to adoption despite a known payback period based on electricity savings. As consumers await a price point that lends to widespread adoption, the LED industry has suffered precipitous declines. However this decline had led to industry consolidation that will ultimately drive prices down to the tipping point of adoption, resulting in tremendous energy savings.

Industry analysts acknowledge that the lighting market will eventually transition to these advanced technologies, yet short-term demand is restrained. Whether due to weaker demand for Liquid Crystal Display (LCD) panels, capacity build up in China, or the increasing share of Organic Light Emitting Diodes (OLEDs), there are concerns of oversupply driving down short-term expectations. However the long-term view remains robust. Industry consultants forecast LED consumption in the Americas to rise to nearly $25B in 2021 from $3.9B in 2011, while other sources estimate that the market may be as high as $70B in 2021.

This phenomenon is best explained by a combination of industry consolidation and changing product demand, which together are expected to drive down the price to a competitive initial purchase point. The LED industry began by providing low energy backlighting used in handheld appliances, moving on to the TV market. With the recent economic downturn, this industry took a major hit as consumers slowed the rate that they upgraded and replaced their TV sets. The LED market had not anticipated this downturn as it continued to ramp production in anticipation of a growing consumer market. Losing the primary industry driver before the consumer market ramped led to a significant oversupply of production, especially in China. In August of 2011, capacity utilization dropped to 40-50% range, causing LED prices to drop precipitously. The Chinese government reduced subsidies, causing significant consolidation that continues industry-wide.

As prices continue to decline, the elephant in the room remains when the tipping point into consumer markets will occur. The consumer market is particularly oblivious to the return on investment of LEDs, unwilling to buy a bulb priced at over $10 no matter how long it will last. Market research indicates that the cumulative cost of an LED bulb is significantly less expensive than other sources in a residential environment, yet lack of adoption seems driven by a convenience factor.

The commercial market faces the same difficulties, illustrated by leading LED lighting manufacturer Cree, which recently released new series of street lights that double the lumens per dollar, leading to performance that “pays for itself” and leaving municipalities with no logical alternative to adoption. Cree’s CEO Charles Swoboda discussed the difficulty of behavior change in the company’s last earnings call, stating that the company faces “selling cost of ownership …[and has to] convince people to try technology they haven't tried… it is an industry that has been doing things a certain way a long time and there's a lot of education.” But at a certain point the basic economics are undeniable. “The fact is, is that when you're building an LED streetlight…[the cost is] the same cost of sending a bucket truck to change a light bulb. So you've got to ask yourself, at what point would a municipality want to ever change another light bulb when they can put a brand new LED streetlight up there?” (CREE Q3FY12 Transcript) Whatever the reason, as labor cost of replacement overtakes bulb cost, adoption will become increasingly likely.

Perhaps the consistent cost decline serves as a prohibiting factor, rewarding consumers with a lower first price the longer they put off their investment, not factoring in the net present value of this investment given energy savings. Commercially available 60W equivalent LED bulbs cost $50 per kilolumen at present, which is down significantly year over year but expected to drop to $2-$3 in a few years, and down to $1 by 2020. Experts attribute this decline to the product of advancements in thermal/mechanical components, driver electronics, economical packaging, the automated assembly process, as well as improved optics.  These declines may be a contributing factor to inactivity.

Although a slow path, the lighting market is positioned to experience the long anticipated dramatic growth within the next year or two. All signs indicate progress, as government regulation banning the sale of 100-W incandescent light bulbs comes into affect amidst declining LED prices, and companies such as Bay Area Startup Soraa take direct aim at the consumer market with lower priced bulbs. While certainly long awaited, this transition will have tremendous benefits to overall energy consumption given that lighting accounts for just under 20% of global electricity demands.

Image Source: Yole Développement taken from Electronic Design Of note: Maintenance costs aren’t included in the comparison.