By Russ Banham

When economic times are tough, just about everyone looks for new ways to cut costs. Cities are usually no different than people in this regard, except their operating costs are exponentially higher and aren't improved by skipping lattes after lunch. Instead, municipalities often have to make more painful cuts, like trimming public services, but there are alternatives that can generate significant, long-term savings while also allowing for upgrades and improvements to existing services. One that's growing in popularity: energy-saving light emitting diode (LED) lights as replacements for outdated energy-draining streetlights.

No rational city official would dispute the long-term savings that can be realized by replacing more typical high-pressure sodium (HPS) street lamps (which include a bulb and a fixture) with LED streetlights. Upgrading to LED streetlights—which are bulbless, solid-state fixtures equipped with multiple light-emitting diodes—can drive down typical municipal energy expenses anywhere from 40 to 60 percent, and with the cost of LED streetlights rapidly declining, a municipality's hypothetical return on investment can be realized in as little as seven years on average.

Nonetheless, it remains hard for many municipalities to bite on the concept because the upfront costs of a streetlight overhaul can be daunting. Not only does a city need to purchase the LED fixtures—for example, Seattle City Light, a publicly owned electric power utility and part of the Municipal Solid-State Lighting Consortium under the U.S. Department of Energy, is currently installing 41,000 LED lights at a cost of $220 apiece—but there's also the added operational expense of replacing the current HPS fixtures. Bidding processes can help get prices down, and according to Seattle City Lights, there are at least three LED manufacturers poised to introduce lights for under $200 per unit at this year's upcoming Lightfair International trade show.

Even with costs going down, many municipalities remain strapped for capital, and buying and installing streetlights to replace ones that have worked fine for years can be a game of political football. Just ask municipalities like Cleveland and Richmond, California, whose LED streetlight initiatives have gotten bogged down in all sorts of red tape.

Seattle, Los Angeles, Anchorage, Washington, D.C., and a host of smaller cities have already overcome the hurdles to push forward with LEDs. On their side is the certainty that the new lighting systems will pay for themselves over time. "In Anchorage, where we worked with the city in developing the LED streetlights, we originally anticipated a 50 percent annual energy savings, but are now realizing 60 percent and counting," says Justin Sternberg, managing director of Continuum Industries, an Anchorage-based lighting efficiency developer for municipal, utility, and military applications.

Anchorage was the first American city to implement a large-scale LED streetlight project, installing 4,000 lights in late 2008. The city originally anticipated it would take seven years to break even on its investment, but it now projects payback in less than five, Sternberg says, explaining that "electricity costs have risen, making the return on investment quicker." When combined with new centralized control systems that can dim streetlights depending on the weather, traffic, and time of day, the city anticipates another 20 to 30 percent savings in energy costs. "Dimming the lights when traffic dies down or when a full moon is up can trim costs quickly," Sternberg says.

Savings are also realized thanks to lower operations costs—LED lights can last up to 50,000 hours compared with around half that for most streetlights equipped with HPS bulbs, which helps justifying installations in harder-to-reach places. It also means maintenance crews generally spend less time installing new lights, notes Todd Givler, an engineer and co-project manager for the Seattle project at Clanton & Associates, a Boulder, Colorado-based lighting design firm. "The payback can vary drastically from city to city, depending on their energy costs or maintenance expenses, but an average seven-year return seems right," Givler says.

And lowering costs isn't the only benefit. "LED streetlights introduce greatly improved lighting quality, including improved night visibility, due to higher color rendering, and increased uniformity," says Edward Smalley, director of the Municipal Solid-State Lighting Consortium headed by Seattle City Lights. Under the amber glow of HPS streetlights, he says, colors become distorted and difficult to identify. A person can see less than 25 percent of colors accurately under HPS lights, whereas by contrast, LED streetlights are usually purchased with a broader color spectrum, allowing color identification of more than 70 percent. "Law enforcement tells us this is a great benefit to them because colors can be more accurately defined by witnesses," he says.

What's more, LEDs lack toxic materials and bring a reduction in greenhouse gas emissions, thanks to both how they're manufactured and reductions in energy consumption once they've been installed.

Seattle City Light had initially explored the installation of LED streetlights in Seattle back in 2007, but the price of the systems, at $900 per solid-state streetlight (excluding the post and other hardware), did not justify the investment, says Smalley. When prices dropped to $350 per streetlight in 2009, the city took the plunge. "At that amount, we figured on a nine-year payback, given an expected 40 percent annual reduction in energy costs," he adds.

Prices for LED lights have dropped another 25 percent over the past year, which means Seattle now expects an even faster return on its investment, closer to eight years. "Once we convert all 41,000 residential streetlights, this will equate to a $2.4 million annual reduction in energy and maintenance costs," Smalley says. So far about half the lights are in place; the rest are scheduled for installation by 2014.

The project did not come cheap—Seattle City Light initially budgeted $24 million for the conversion project, which has since dropped to a projected $18 million as a result of falling LED prices. How did the city meet the bill in these resource-strained times? "The project was financed by the municipally-owned utility and is being repaid with interest from the city general fund," Smalley says. "In other words, the city is paying the utility, which is a department of the city, back with interest." (See our infographic for how the math worked out for another city doing a conversion to LEDs, Los Angeles.)

Energy budgets in big cities are often large enough to justify taking the short-term financial hit associated with LED installation in order to reap the long-term rewards. And if they don't have those funds, they often have the ability to interest third parties willing to explore creative partnerships that can offset installation-related costs.

Other, often smaller cities and towns have resorted to less complicated funding strategies, including using money from the American Recovery and Reinvestment Act of 2009 (ARRA). In Parlier, California, for instance, the stimulus money from ARRA paid for 158 LED streetlights, reducing the town's annual energy expenses by more than $10,000.

And in big cities and small towns alike, that would light up any city councilperson's face.

Russ Banham is a veteran financial journalist and frequent contributor to The Wall Street Journal, Chief Executive, CFO, and many other business publications. He is the author of several books, including "The Ford Century," a history of Ford Motor Co.