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Glossary · Economics

IRR (Internal Rate of Return)

The discount rate at which a project’s net present value equals zero, representing its effective annual return.

The internal rate of return (IRR) is the annualised return implied by a project's cash flows. It is found by solving for the rate that makes NPV zero, usually iteratively.

0 = −I0 + Σt=1..n CFt / (1 + IRR)t

If IRR exceeds the hurdle rate, typically the WACC or an investor-specific target, the project creates value. Investors distinguish:

  • Project (unlevered) IRR: based on total cash flows before debt service.
  • Equity (levered) IRR: cash flows to equity after debt service; higher than project IRR when debt is cheaper than the project return.

Typical target returns for renewables in mature markets (2024 to 2025): contracted utility-scale solar and onshore wind equity IRRs of about 7 to 10% nominal; merchant or emerging-market projects 10 to 15% or more; offshore wind 8 to 12%. Regulated networks earn around 5 to 7%. Residential PV systems commonly show IRRs of 6 to 15% depending on tariffs and self-consumption.

Limitations: IRR implicitly assumes interim cash flows are reinvested at the IRR itself, can yield multiple solutions when cash flows change sign more than once (for example large mid-life repowering or decommissioning costs), and ignores project scale. The modified IRR (MIRR) addresses the reinvestment assumption. For ranking mutually exclusive options, NPV is preferred.

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Related terms

All terms →
  • NPV (Net Present Value)

    The sum of all future cash flows of a project discounted to today, minus the initial investment; a positive NPV indicates value creation.

  • WACC

    Weighted average cost of capital: the blended return required by debt and equity investors, used as the discount rate for energy projects.

  • Discount rate

    The annual rate used to convert future costs and revenues into present value, reflecting the time value of money and investment risk.

  • Payback period

    The time needed for the cumulative savings or revenues of an investment to equal its initial cost.

  • CAPEX

    Capital expenditure: the upfront investment to build an energy asset, usually quoted per kW of capacity for power plants or per kWh for storage.

  • LCOE (Levelized Cost of Electricity)

    The constant price per MWh that recovers all lifetime costs of a power plant, discounted to present value, divided by its discounted lifetime output.