Economic feasibility of energy efficiency improvements in street lighting systems in Rome

Many Italian street lighting systems are obsolescent, considering the best available technology. Energy-efficiency improvements of street lighting systems are possible using Light Emitting Diode (LED) technology, and many cities are investigating how to effectively implement LEDs in their systems. However, the initial costs of LED luminaires are considerably higher than the costs of other technologies, and investment costs may be a barrier to implementation. In this paper, it is discussed the adoption of LED luminaires to replace the conventional lamps in public-lighting systems of Rome (Italy); calculating possible savings of energy and costs. Based on this analysis, despite the cost of LED luminaires, the use of LED technology is economically advisable. Strategic options and flexibility are introduced in the project. Specifically, it is considered the possibility of splitting LED investment into five stages, deciding whether each part should be implemented. Real options are used to evaluate the economic cost-saving of such a project, considering uncertainty of the electricity price and multi-stage investment. The economic value obtained from real option analysis is higher of that obtained from net present value because the latter does not consider some flexibilities of the project. Taking into account the sources of uncertainty, real options provide results that are more realistic.