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Is A Subsidy On LED Lighting Economically Viable?

Anand Srinivasan's picture
Marketing Consultant Hubbion

Anand Srinivasan is the founder of Hubbion, a suite of free business apps and services. Also, he is a regular contributor to and writes on Internet Media Statistics at...

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The governments in many countries have been nudging their citizens to move away from electricity guzzling incandescent bulbs to greener alternatives like LED. Incandescent bulbs are, in fact, banned in a number of countries. According to an estimate, the ban on the use of incandescent bulbs has helped Europe save as much as 40 TWh of electricity each year, not to mention reduction of CO2 emissions by as much as 15 million tons.

But the switch to LED is not going to be easy, at least in poor and developing countries. Despite the dramatic fall in prices of LED bulbs over the past several years, they are still five to ten times more expensive than incandescent bulbs. That is not to say that LED bulbs are not a better alternative. Studies show that LED bulbs can have a lifespan of over 50,000 hours. To give this some perspective, the corresponding figure for an incandescent bulb is just 1,200 hours. In other words, if you were to run a bulb for twelve hours every day, an incandescent bulb would last for just 100 days. In comparison, the LED bulb could last well over 11 years.

These studies however may not make much sense to the average daily wage worker who might be more concerned about the higher capital investments required to install an LED bulb. To such a consumer, the per-unit costs matter more than the lifespan.

Government subsidies could thus help these consumers hop on the LED bandwagon without having to worry about the higher per-unit cost. In 2015, the government of India announced a scheme to offer free and subsidized LED bulbs to consumers across the country. The UJALA scheme is expected to replace 200 million incandescent light bulbs across the country with LED bulbs, saving 35 million kWh of electricity. In monetary terms, that’s a saving of over $2 billion dollars.

The game plan here is to force an increase in demand for LED bulbs through subsidies and incentives. This helps manufacturers scale up production volume, which will subsequently bring down prices. This way, when the consumer is in the market for new bulbs, the retail price of lighting equipment will be low enough for them to afford it without the need for any subsidy.

So how well are these incentives working economically? In the case of India, the production of LED bulbs shot up from one million units a month in 2014 to 40 million in 2016. Subsequently, the price of these products has fallen from INR 310 (roughly $4.75) in 2014 to just over a dollar at present day prices. The price has been brought down even further to less than 50 cents for consumers taking advantage of the government subsidy.

There are over 250 million households in India and over 270 million LED bulbs have been distributed by the government so far. Assuming a mean price of $2.5 per bulb over the three year period, this is expected to have cost the government about $675 million. At $2 billion dollars, the corresponding savings in electricity are several times over this figure.

LED lighting, like solar panels, has proved to be an economically viable replacement for legacy technologies. It is high time that countries came together in pushing forward the adoption of these green technologies. This is the only way to push higher demand that will help bring down the cost for such technologies.

Photo Credit: Benjamin Linh VU via Flickr

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