Is designing a lighting program as risky as playing a game of poker?
Knowing when to hold ‘em and knowing when to fold ‘em
Risk is a fact of life, and inherent to every business decision we make. While we can never eliminate risk, we can mitigate its impact on our decisions by assigning probabilities to possible outcomes. Think about a game of poker – all players have access to a limited amount of public data or the cards that are face up. They also have limited access to private data or the cards in their hand. While an experienced player may hold an inferior hand, they possess a superior knowledge of assigning probabilities to outcomes. The ability for a player to mitigate risk, or more effectively predict outcomes, is what makes poker a game of skill, and not chance. Knowing ‘when to hold em’ and ‘when to fold em’ is more important in the long run than the actual hand the player is dealt. As in a game of poker, risk in business is not always a bad thing. Risk can be quantified and controlled, mitigated or accepted.
Uncertainty is also a fact of life, but unlike risk, there is little we can do to prepare. Uncertainty is chance, it’s rolling the dice, and letting them fall as they may. Uncertainty cannot be managed proactively. We can only react to uncertainty.
In utility lighting programs, an example of risk would be low net-to-gross (NTG) savings for a LED measure. To mitigate attribution risk or assigning savings to those who would have otherwise participated, we look to attract market segments with low levels of historical adoption to solve the ‘free-rider’ problem. As with our poker example, some program designs are better at proactively identifying risks and developing mitigation strategies. These programs are rewarded with a higher NTG score.
I see three unique classes of uncertainty facing all utility lighting programs: technological uncertainty, market uncertainty, and policy uncertainty. Here’s my case for why this uncertainty exists.
Technological Uncertainty: In August, I spoke at the ACEEE Summer Study about the Rise of the IoT. Here is a link to my recently published paper. When looking specifically at the lighting markets, the rise of physical-cyber lighting systems introduces technological uncertainty into our utility rebate programs. First, there is uncertainty about energy savings resulting from this advanced technology. Let’s consider an internet enabled, color tunable LED lamp. To connect to the internet, the lamp requires a wireless receiver and a hub for establishing connectivity. These ‘always on’ features consume additional energy outside of illumination. Different light temperatures, i.e. colors, have different points of efficiency. Some color temperatures use more energy than others. At this point, our industry has not yet agreed upon how a program should address the issue of qualifying savings for these LED lamps.
Another point of technological uncertainty for our programs is device interoperability, or simply how to make all this connected stuff talk together. Today there are a variety of protocols, or languages, that Smart Lighting utilizes. The IoT is happening in an ad hoc manner – making it very difficult for a program to control the specific types of connected devices that are ending up behind the meter. Program design decisions can mitigate some interoperability risk, but until the larger market standardizes around a common protocol, programs will be faced with this uncertainty.
Market Uncertainty: If you haven’t heard, the US is officially in a Trade War, and the LED lighting industry is caught in the middle. Lighting manufacturers rely on either rolled steel or aluminum to create a fixture’s housing. Besides the housing, LED modules, arrays, and drivers are also now exposed to new tariffs. The lighting manufacturers have already taken notice, with Acuity, Eaton, LEDvance, and others each announcing a 6-8% price increase for all their LED products.
For our utility programs, there has been an expectation that LED prices would only continue to fall. Programs now must consider how rising prices will impact their incremental cost and rebate structures. While no one knows how long this situation will last, we can assume that rising prices will slow customer momentum for adopting new types of lighting technologies.
Policy Uncertainty: Back in 2007, Congress adopted light bulb standards as part of the Energy Independence and Security Act (EISA). EISA consists of two phases; the first of which has already been enacted, and the second of which is creating much uncertainty for utility lighting programs due to unresolved legal challenges[i] which most utilities are planning will significantly impact their program portfolio in 2020.
Utility Programs: Residential lighting programs have been grappling with this uncertainty for the past two years. The adoption of the new standard will effectively end cost-effective residential lighting programs since the lighting baseline will be a fluorescent bulb, drastically reducing energy savings for new energy efficient bulbs. As a hedge against the backstop having been triggered, residential programs are looking toward Smart Lighting. Earlier this year, I participated in a webinar, hosted by the Consortium for Energy Efficiency (CEE), on the Lighting of Tomorrow. Residential Smart Lighting produces many energy, and non-energy benefits for a household, but this class of products are particularly exposed to the technology and market risks that I have described above.
EISA will also have an impact on C&I programs which incentivize screw in lamps, though the effect will not be nearly as pronounced as with residential programs since linear fluorescents are already the baseline for 72% of the market. Earlier this summer, the Downlights Consortium (DLC) released a report on the energy savings potential of LED lighting and networked controls. It also touched on EISA’s impact on both residential and C&I markets. [ii] The uncertainty around EISA presents utility C&I programs with an excellent opportunity to begin exploring how to cost-effectively bring Smart Lighting Solutions into their portfolios.
DNV GL has successfully designed and implemented Smart Lighting Systems projects on behalf of our utility clients for four years and have offerings that can be tailored to fit a variety of market segments, including the Small and Medium Business (SMB) market segment. Our team has significant project experience in both retrofitting and new construction of lighting projects. We work through the project life-cycle to identify, justify and evaluate energy-saving measures and provide post-installation engineering review to verify savings. If you would like more information on Smart Lighting, please feel free to reach out, or visit our Smart Lighting Knowledge Hub. We’ve posted a variety of white papers and webinars on this topic to help your utility make a more informed decision.
What do you think about the uncertainty that exists in the lighting world? Please like, share and comment on your social network!
Our team is available to work directly with large institutions to assist them with Smart Lighting Systems projects. For more information, please contact Wesley Whited. Wesley Whited is a Senior Consultant for Smart Lighting Systems at DNV GL. Mr. Whited has seven years’ experience in the commercial lighting market ranging from project management to sales. Mr. Whited is a graduate of West Virginia University (WVU) and holds a MBA from Capital University in Columbus, OH
[i] The second phase of EISA creates a national lamp efficiency standard of 45 lumens/watt and applies this standard to most common types of lamps starting in January 2020. The effect of this new standard would effectively eliminate Halogen lamps from the market. NEMA, the trade organization that represents lighting manufacturers, sued the DOE to block the implementation of this standard. To further complicate matters, EISA contains a backstop prevision, stating that the 45 lm/watt standard becomes the law of the land in January 2020 if the DOE could not issue an updated standard by January 2017. The deadline for DOE clarification has come and gone, and now the lighting industry is very unsure if the backstop provision has been triggered. It gets more complicated, as California and Nevada have already adopted the 45 lm/watt standard, possibly putting manufacturers in a position where they can sell or not sell Halogen products depending upon the jurisdiction. I hope everyone is as confused by all of this as I am! Frankly, I see only the federal courts being able to provide clarity.