LED bulbs cost far more than conventional light bulbs, but they could become the cheapest light on the planet if the circumstances work out.

Rather than build new gas or even solar plants, utilities or third party service organizations could take care of a significant chunk of power demand by giving away LED bulbs to consumers.

"For a utility to give away those light bulbs winds up being an effective cost to them, using full financing, of less than 2.5 cents a kilowatt hour or less expensive than any claims that anybody makes for generating power -- even with coal with fully depreciated power plants and no externality tax," said Alan Salzman, co-founder of VantagePoint Venture Partners.

Here is our rough extrapolation of how the math might work. Good 60-watt equivalent LED bulbs now typically cost more than $40 dollars, but a variety of large companies such as Philips, Osram and Toshiba and startups like Bridgelux (VantagePoint invested in Bridgelux) and Lemnis Lighting want to bring it down to $20 to $25 in the next one to two years -- and as low as $10 after that. The declining price of LEDs will be topic number one at Lightfair, which is taking place next month in Las Vegas.

A 60-watt equivalent LED bulb might consume 7 to 12 watts. For the sake of argument, assume the average will be 10 watts. If that light socket is occupied by an incandescent bulb, that's a savings of 50 watts per socket.

At $20 a bulb, a utility could buy 10 million LED bulbs for $200 million, not even factoring in a volume discount. In turn, that would result in 500 megawatts worth of capacity being taken off line. For $400 million, a utility could shave a gigawatt from its needs, or about the same amount of power produced by a multibillion dollar nuclear or coal plant that would cost billions and take years to construct.

Lighting "is a $100 billion industry that is going to flip because it makes economic sense," Salzman added.

"If you had a product that costs $40 to $50 it could possibly be enough" depending on the energy savings and structure of the agreement, added Warner Philips, the CEO of LED bulb maker Lemnis Lighting, in a separate interview. (His great grandfather started Philips Lighting way back when, and rode the rails in Russia and Europe to sell the concept.)

There is no shortage of sockets out there, either. There are 52 light sockets in the average U.S. home and 40 in the average European residence, according to statistics from Philips Lighting. With 100 million residences in the U.S., that makes 5.2 billion light sockets -- and a good percentage still have incandescents in them. We're extrapolating here, but you get the idea.

The lighting industry, of course, would have to navigate a number of hurdles first. One, the price of LEDs would have to come down and production volumes would have to increase. Manufacturers have made fairly substantial strides in these areas, but LEDs remain a fraction of the market in commercial and residential lighting. Last week, Philips said it would come out with a 60-watt equivalent LED bulb this year, but they didn't offer a price. GE has a 40-watt equivalent coming in late 2010/early 2011 that will cost $40 to $50.

Two, consumers and utilities would have to be convinced of the color, reliability and quality of the lights. Many early LED bulbs gave off an eerie "alien autopsy" sort of light. Some consumers also worry that LEDs will not live up to the claims that they can last 35,000 to 50,000 hours. CFLs are supposed to last 15,000 hours but often burn out early. (Conventional incandescent bulbs only last 1000 hours.) Any product would have to undergo a battery of tests and public hearings.

Three, utilities would have to figure out a way to make sure consumers don't sell their new fancy bulbs on eBay. It might only work in areas where smart meters already exist. Unfortunately, some members of the public are already up in arms about smart grid, alleging that the new meters have overcharged them and have created the conditions for a security and privacy disaster. Telling consumers that they will get penalized if they change their light bulbs might be too much of a public relations challenge for many utilities to take on.

Four, utilities could just give away more CFLs, which only consume 15 watts.

On the other hand, many of these problems could be ameliorated by having the bulbs go to consumers through third party service providers under energy efficiency contracts, said Philips. These companies would go into a home, retrofit it, and charge as a fee a percentage of the power saved over the coming years. If consumers complained that they weren't saving as much power as they had hoped, a quick audit would determine if they removed their fancy bulbs or not. With accurate data bout retrofits, the power savings could also be bundled for carbon credits in certain jurisidictions.

"They (third party providers) will be taking on part of the role of the utility," said Philips.

Interestingly, Matt Golden, co-founder of software developer/retrofitter Recurve, recently told us about his idea for selling retrofits as a service for shifting peak power, a similar concept.

Commercial building owners might jump at the chance to get free LEDs. Tube fluorescent lights are the standard in U.S. commercial buildings, so the savings from power would be decreased in this scenario. Nonetheless, building owners and real estate investment trusts would likely see their maintenance bills associated with lighting plummet. In some early LED experiments, half of the savings came from lower maintenance costs.

Think of it. A REIT would get free bulbs, lower maintenance bills, and be able to tell prospective tenants that their electricity bills will be lower, which in turn would allow the REIT to charge a slightly higher rent.

Approximately 25 percent of the energy consumed in commercial buildings goes toward lighting, according to the Department of Energy's Buildings Energy Data Book.

But will utilities go for this? "I believe so," Salzman said. "We've been talking with a number of them. A lot of the existing capacity reaches end of life over the next twenty years... It is cheaper to give away light bulbs than it is to generate any other source."

Eric Wesoff contributed to this article.