A growing variety of options are available for financing an LED street lighting replacement program. One or another approach may be preferable based on the system ownership and maintenance model in place. Common existing models include: 1) city-owned and maintained, 2) city-owned and third-party maintained, 3) utility-owned and maintained, and 4) utility-owned and third-party maintained.
Upgrading may require a negotiation between two or more parties; for example, corresponding to the number of parties involved in some form of contractual arrangement related to the street lighting system. Negotiations can further depend on such variables as the relationship between the parties, utilities commission guidelines, local legislation, and the level of depreciation of existing assets. For more specific information about your local regulatory environment, contact your local utilities commission or browse the Resources list at right.
Various financing options include:
Some system owners may be able to use existing operations and maintenance (O&M) or capital budgets to finance a project, if the owners have sufficient budget flexibility. Most municipalities, however, restrict how budgets can be used. For instance, success in a targeted effort to reduce maintenance costs typically results in a reduced maintenance budget rather than in savings that are available for reinvestment. Learn more about New York City's experience with self-funding.
A number of municipalities across the U.S. are taking advantage of publicly owned utilities to provide funding assistance with LED streetlight retrofits. In most cases, the funding comes in the form of a low-cost or market-rate loan that is repaid with project savings. This model has worked for a host of smaller municipalities, including several located throughout the state of Iowa, as well as for some larger municipalities such as Los Angeles and Seattle. Learn more about Iowa's experience and Los Angeles' and Seattle's experience with utility financing of municipally-owned streetlights.
Many utilities offer energy conservation grants and rebates to their industrial, commercial, and residential customers. An increasing number of utilities are now also offering similar incentives to their street lighting customers. For instance, utilities such as Pacific Gas & Electric in northern California and Puget Sound Energy in Bellevue, WA, (whose streetlights are all utility-owned) are providing conservation incentives for LED conversions, as is NSTAR in Boston, MA. Learn more about the City of Boston's experience with using rebates to cover a significant portion of their LED streetlight conversion project costs.
Financing options from third-party services, such as energy services companies or product vendors, are starting to gain attention for LED street lighting purchases.
Energy savings performance contracts often include arrangements for third-party financing that are facilitated by the energy services company (ESCO) contractor. Funds are repaid to the financier either through guaranteed savings achieved by the contractor, or through shared savings where the ESCO provides the financing (and the owner does not have to acquire additional capital). Recently, the shared savings model has been getting more attention by some owners, because the contractor and all upgrades are paid from the savings achieved by the project. The ESCO provides the financing and carries the credit and performance risks as well. A variety of options are available, depending on the contract.
One new model becoming available that relies on the shared savings contract approach and does not require additional capital from the owner is the Global Management Performance Contract (GMPC). In a GMPC, the contractor takes on management of the entire lighting system and agrees to meet a number of performance targets, which include replacement of some portion of the incumbent lights with more efficient products. There are a number of attractive features of this approach from a lighting owner's standpoint, including guaranteed savings and performance, and outsourced risk. See the link in the ESPC box above for more information on GMPCs.
Leasing is another option that may not require additional capital from the owner, and is already commonly offered by ESCOs for municipal projects. Such leases are available only to tax-exempt entities such as municipalities, states, counties, and schools. Often called tax-exempt lease purchase (TELP), this arrangement provides the lender (or lessor) with tax benefits which are passed on to the lessee in the form of lower interest rates. These lower interest rates, in combination with the energy savings and any other cost savings resulting from the lighting upgrades, provide the opportunity for post-retrofit costs (including lease payments) to be lower than the original, baseline costs associated with the incumbent lighting system. TELP agreements are lease-to-own, so that at the end of the contract term the equipment is owned by the municipality. Benefits of lease agreements include their not appearing as long-term debt and thus not impacting borrowing capacity, and the ability to get them in place relatively quickly compared to other options that require voter approval. In addition, a non-appropriations cancellation clause, often present in such agreements, allows a municipality to cancel prior to lease completion if funds are not budgeted to continue. Considerations include the fact that some firms offering TELP contracts may handle installations via their own contractors, rather than via existing municipality crews, possibly conflicting with existing labor contracts. The inclusion (optional or otherwise) of maintenance services in a TELP agreement may also vary from firm to firm.
Vendor financing is another option gaining momentum. A growing number of product manufacturers now offer financing that may include both project materials and labor, and even third party equipment in some cases. Although manufacturer financing in other product categories, like automobiles, has existed for decades, this resource has only recently surfaced in the street lighting arena. Current examples found in the media have involved large and well-known manufacturers as well as smaller companies that users may not have previously heard of. Of course, the terms, means of payment, and other aspects of a particular contract depend on a host of factors, just as in financing any other goods. Users interested in this approach should contact their manufacturers of choice (or perhaps during the process of soliciting product proposals) to ask whether financing is offered.