Today we published our latest Enterprise LED market research, which studies trends in commercial and industrial LED lighting and profiles the top vendors.  The report includes our newly developed LED Lamp and Fixture Pricing Index which tracks historical pricing for these  products.

The idea for our index came during customer interviews.  In talking with corporate managers, a theme emerged:  ”It seems like LED performance has really increased, but they’re still pretty expensive – maybe I should wait until next year when prices come down?”  As we were already testing periodic vendor pricing, tracking an average price for a basket of Enterprise LED products was a logical addition to our research.

These managers are no dummies.  They’ve seen pricing for other emerging semiconductor-based products drop dramatically in a few year period.   Will this be solar, where panel prices dropped 50% in two years?  Or the iPad, which seems to have maintained its pricing?  So far our index shows its been somewhere in between.   Over the last two years prices have declined by  24%.

So back to their question – where are prices headed?  If you were a Wall Street index trader you would need to consider three market drivers, each with competing lines of thinking:

1.  Balance of System

While LED price/performance has surged, chips (the semiconductor part of an LED fixture) are now only 20-30% of the cost in a fixture’s bill of materials.  A few years ago they were 50% of the cost.  While its widely assumed that LED chip prices will continue to decrease based on newer chip technology and manufacturing scale, the balance of system cost is now the bigger opportunity.  Innovations in optics, thermal management, mechanical structure and power are the targets.

So how much can they be reduced?  Much harder to say.  Since an LED fixture is really an integration of these interrelated elements, maybe CREE has the best idea with last year’s purchase of fixture manufacturer Ruud/Beta.  Could their new view into LED fixture manufacturing deliver CREE new ways to drive cost reductions?  If so, expect GE Lighting to buy their own LED chip company.

2.  Utility Rebates

One day a year ago an LED A lamp at Home Depot went from $45 to $22.   The local utility had introduced a new downstream incentive program which simply subtracted their rebate off the Home Depot shelf price – no customer rebate paperwork necessary.  While the consumer’s energy savings payback was still over 5 years, store volume for LED A lamp picked up instantly.

The psychology of utility rebates can have a similar impact in the corporate market.  Traditional lighting upgrades are not glamorous and often take 12-24 months to make the corporate budget cycle.  How corporate managers react to “free” utility money for more visible LED projects is worth considering.  Does it drive behavior, budgeting and faster investment decision making?

Financial payback still rules the day for corporate lighting retrofits.  With utility rebates recently supporting 20-50% of an LED project’s entire cost, the corporate budgeting wheels have started to turn.  One Groom Energy customer recently secured a 65% project rebate for a one year payback project which wouldn’t otherwise have been budgeted.

One line of thinking says that as utility programs roll out more broadly, the incentives will similarly drive greater customer adoption, but somewhat insulating LED fixture manufacturers from pricing pressure.

Alternatively, as LED fixture pricing falls, utilities could scale back their rebate levels accordingly, knowing that the investment payback needn’t be TOO wonderful…or, just as California utilities are now phasing out rebates for outdated T-12 fluorescents, maybe in short order LED rebates programs disappear altogether, just after they really got started.

3.  Land Grab Competition

Like any early, but eventually large market, manufacturers are competing at each step of the race.  They’re focused on their new product introductions, building brand awareness, delivering successful case studies and sales channel training.

Large traditional US fixture manufacturers, who earlier took their time introducing LED based products, have now ramped up their efforts.  Even though they’ll cannibalize sales of their traditional fixtures and replacement lamps, they now see the market direction and want to lead in the first new technology to hit their industry in 30+ years.

Consumer electronics focused companies are entering as well.  LG, Panasonic, Samsung, Sharp and Toshiba have each announced plans to enter the LED general illumination market.  Smaller Asian based manufacturers, with lower cost structures, (and perhaps lesser quality, but lower cost LEDs) are also trying to make inroads.

And new companies like Digital Lumens and LEDnovation are developing their own customer base and sales channels, promoting the virtues of pure LED lighting, while betting that fast customer adoption will help them compete with slower, larger, brand name lamp players like GE, Philips and Sylvania.

A New Metric for Enterprise Lighting

2010-2012 Enterprise LED customers have seen aggressive pricing from all of these vendors.  Bidding on some large visible projects has resulted in manufacturer margins which are not sustainable – but the deals have been won.

These same customers have also learned that with “expensive” LED lighting, the more light output they want the higher the project’s cost and the lower the energy savings.  They more clearly understand the value of light energy measured as footcandles on their desk, floor or walls.

So in the next few years, just as solar quickly moved to a $ per watt pricing comparison, the next Enterprise LED pricing index will likely be tracking $ per footcandle.