People who invest money for a living face a quandary. Stocks, which have enjoyed an epic bull run, are at record highs and seem unlikely to go much higher. Europe and Japan are barely growing, while China’s economy is slowing down. Because economic prospects seem so bleak, interest rates on debt are remarkably low. In a stagnating world, attractive returns seem tough to come by.
But when I hear professionals talk about how difficult it is to find promising investments, I often want to hit them in the head with a light bulb—specifically, with an LED. Because there are still a bunch of investments that offer truly eye-popping returns. To a degree, the problem isn’t a lack of decent options, but a lack of imagination.
Take light bulbs. Seriously.
If you could make an investment that would return all the capital in two years, and then pay a 50 percent dividend for each of the next 18 years, it would be pretty phenomenal. It would double your money in four years, and quadruple it in eight years. That’s the promise a company in Boston called Digital Lumens is making—and apparently keeping—to a growing list of building owners around the world.
LEDs use 80 percent less electricity than traditional bulbs to produce the same amount of light. Make LEDs more intelligent—with dimmers, sensors, and software that adjusts the use of light to external conditions and space usage—and the savings can be greater. In fact, Digital Lumens promises 100 percent of the lighting for 10 percent of the cost.
The company, founded in 2008, builds and installs light systems and fixtures. “The idea was to combine a few emerging trends: LEDs, and smart technologies,” says Tom Pincince, chief executive officer of Digital Lumens, “and then marry them together with the idea of making every light smart that in turn drives new levels of efficiency.”* Yes, they cost much more than old-fashioned incandescent bulbs or fluorescent ones. But the operating costs of LEDs are so much lower that they make effective investments—especially for buildings that are lit most of the day.
Here’s a hypothetical example Pincince offers. Take a 100,000 square-foot building with an annual lighting bill of $100,000. The customer buys the new lighting system for somewhere between $150,000 and $250,000. The annual lighting bill falls to $10,000, saving $90,000 per year. The customer recoups the entire investment in the form of lower lighting bills in 18 to 33 months. And because systems can last for up to a dozen years, customers will continue to collect $90,000 annually in savings for years to come. According to Pincince, the average payback time for a Digital Lumens system is two years. Results vary, of course. A mall where the lights are on 18 hours per day will have a shorter payback period than a warehouse in which the lights are only on six hours per day.
Customers I spoke to backed up the claims. “Digital Lumens has come up with very efficient ways to operate these lights,” said John Fershtand, director of fleet operations and energy management at Ben E. Keith, a large Texas-based food distribution company that has nine distribution centers in the Southwest, ranging in size from 150,000 to 600,000 square feet. In 2012, Ben E. Keith retrofitted a 100,000-square-foot freezer section of a warehouse in Amarillo, Texas, with Digital Lumens lights. In contrast to fluorescents, Fershtand notes, the LEDs function well in the cold. And they have performed financially as promised. “The return on that investment was about 18 months,” Fershtand said. “And now it’s all gravy. It’s the gift that keeps on giving.” The company installed Digital Lumens fixtures in a new facility built in Houston in 2013, and plans to do so in a new warehouse in Little Rock.
Of course, the upfront costs for LED systems can be substantially higher than the costs for fluorescent systems. But because the systems are designed with greater intelligence, building managers can light the same space with a small number of fixtures. Stone Brewing Company, based in Escondido, California, is a burgeoning craft-brewing empire, with a brewery, two farm-to-table restaurants, six stores, and expansions planned for Virginia and Berlin. In 2012, when it started construction on a new 60,000-square-foot packaging hall, associate project manager Joshua Lichtman was looking for efficient lighting systems. After all, the packaging facility is open around the clock.
Digital Lumens designed a system with 42 fixtures—compared with 101 fixtures suggested by a different company that relied on fluorescent bulbs. Why? Digital Lumens bulbs are equipped with sensors that can adjust to natural light. “Every light is independently intelligent, and they’re networked together,” Licthman says. By contrast, most fluorescent bulbs are either on or off—they have no dimmers. Using conservative assumptions, Stone Brewing will recoup its investment in four years, and then earn a 25 percent annual return in the form of lower lighting costs for as long as the bulbs last. And that’s assuming electricity costs stay constant. Should rates rise, the savings will be even greater.
For many building owners, the returns make these investments no-brainers—even in the absence of subsidies or tax credits. So it’s no surprise that Digital Lumens is on something of a tear. The company says that its systems now cover 200 million square feet of space—a sum that doubled in 2014. It operates in 35 countries and raised $23 million in venture capital last fall.
And there’s much more room to grow. Pincince estimates LEDs now account for about 10 percent of the commercial and industrial lighting market, and that smart systems like the ones he builds account for only a fraction of those.
Most economists—and most CFOs, CEOs, and others responsible for passing judgment on the utility of various investments—continue to think of light bulbs as disposable goods, as costs. But technology and innovation have turned them into capital investments. When you buy a more efficient lighting system, you’re not just acquiring a bunch of networked light bulbs. You’re purchasing an asset that will produce a stream of cash for a decade or more.
For now, Digital Lumens’ systems—and, by implication, switching to LED bulbs wholesale—are only realistic investments for companies and institutions, not for individual households. This is a recurring theme in the efficiency arena. The technologies and products that offer a significant return on investment in the form of lower operating costs generally make the most sense for companies and professional users that are energy-intensive. The electric buses that Proterra makes will pay back their extra cost in fuel savings much faster than a Tesla will, because the buses run 12 hours a day. It makes all the sense in the world for a company like Coca-Cola to hire XL Hybrids to turn service vans into hybrids, because they rack up a lot of miles. But paying a few thousand dollars extra for a hybrid sedan that will be driven 5,000 miles annually will yield a paltry return. As consumers, we may not want to think of our home lighting systems as financial instruments yet, but businesses can do a lot of good for the planet and their balance sheets by evaluating utopian energy-saving products as cold, profit-minded investments.
*Correction, Jan. 27, 2015, 7:30 p.m.: This article originally misidentified the chief executive officer of Digital Lumens. His name is Tom Pincince. (Return.)