The Intricacies of LED Streetlights and Financing
By Grant Faber, SEMREO Intern and UM Student
The case for municipal conversion to LED streetlights in Southeast Michigan is more than clear; according to a University of Michigan study, conversion can save municipalities an average of 55% of their energy costs (“Creating a Plan”). Such a reduction in monthly expenses frees up operating funds for other initiatives that benefit residents. LEDs also emit higher quality light, which improves the aesthetic feel and security of cities. Reduced energy usage by LEDs takes pressure off the electric grid and climate as well.
With such economic, environmental, and aesthetic benefits, one would think that most municipalities would convert their streetlights immediately, but there are various barriers that prevent municipal leaders from doing so. In Southeast Michigan, the local utility – DTE Energy – owns most of the street lighting fixtures in most municipalities. While municipalities are paying to light the streetlights and want to reduce their costs and environmental impacts, they cannot replace them with more efficient LEDs whenever they want because they do not own the lights. Even when a municipality and DTE agree to convert older streetlights to LEDs, a financial stumbling block is encountered: municipalities must pay the conversion costs. Averaging around $250 per fixture, this “Contribution in Aid of Construction” (CIAC) covers fixture purchase and installation, among other things. Financially ailing municipalities cannot pay this expense, and municipalities in better fiscal condition hesitate to take on debt to pay for streetlight conversion.
The solution to this problem is proper financing. Municipalities generally issue bonds to raise funds for projects, but most in Southeast Michigan want to minimize liabilities on their balance sheets due to debt limits and risk of insolvency. Below are some financing options used by other municipalities around the country along with reasons as to why they may not work in Southeast Michigan:
- Self-funding – This mechanism involves paying for conversions using operating funds. While very convenient and expedient, LED conversion projects are often too large and expensive for most municipalities to pay for “out of pocket.”
- Subsidies and grants – Michigan’s Department of Treasury has offered Distressed Communities grants that several municipalities have used to cover LED conversion CIAC costs. While many municipalities are eligible to apply for these grants, in practice only the worst-off municipalities are competitive, and by now most of them have used these grants to fully convert to LEDs.
- Utility-sponsored on-bill financing – DTE’s new streetlight tariff allows the utility to pay CIAC costs upfront then recover them over time by adding financing repayments to the municipality’s monthly energy bill. However, DTE’s regulated rate of return on capital, at almost 8%, creates terms unattractive to most municipalities, and the company has yet to actually offer this option.
- Energy savings contractors and other 3rd party ownership models – These models involve private entities that fund conversion in exchange for a portion of the savings. This mechanism is largely infeasible in Southeast Michigan, as the municipalities and private 3rd parties need to be able own the streetlights at some point with these contracts.
- Vendor financing – Some LED manufacturers offer conversion financing to municipalities and other customers. However, this approach is not feasible when the utility owns the fixtures.
- Municipal bonds – Such bonds count against municipalities’ debt ratios. In addition, as the municipality does not own the fixtures, there is no asset to record against the debt liability, which may make the bond riskier and more expensive.
- Revolving Energy Loan Funds (RLFs) – RLFs start with seed capital, pay for a series of energy efficiency upgrades, and then use the savings from those upgrades to pay for further upgrades. However, RLFs require seed capital and can be very slow to revolve, making them largely unsuitable for LED conversions.
One financing strategy that has been deployed successfully (in Ypsilanti, for example) is creating dedicated revenue streams, which can take the form of special assessments on residents or tax-increment financing. With this mechanism, the costs of conversion are passed on to the property owners who benefit most from the project. While this solution has been proven to work, it may face resistance from residents and business owners who simply do not want to pay more and/or may not care about street lighting. Also, special assessments are especially infeasible for impoverished communities where residents cannot afford to pay more in taxes yet have an especially great need for the public safety benefits that come with quality streetlights.
One way SEMREO serves municipal interests is by bundling energy projects across municipalities to realize economies of scale in financing, construction or operations and by reducing the information costs municipalities incur when entering into projects alone. In the case of LED streetlight conversion costs, we are exploring feasibility of developing a shared financing facility that any municipality could tap to cover CIAC costs.
While the borrowing rates of such a facility would likely be no lower than municipalities can get on their own, it would be more convenient for municipalities to acquire turnkey financing for their annual conversions, compared to the ad hoc solutions many municipalities currently scramble to arrange each year. Dependable financing would lead to increased municipal demand for LEDs that could hasten the pace of system-wide conversion by DTE. Currently, DTE hesitates to invest in increased capacity owing to the number of cities that have been unable to finance proposed conversion projects.
Read more about SEMREO’s history of advocating for LED streetlights and our recent LED rate case victory here: http://regionalenergyoffice.org/what-we-do/municipal-street-lighting/