WACC
Weighted average cost of capital: the blended return required by debt and equity investors, used as the discount rate for energy projects.
WACC (weighted average cost of capital) combines the cost of debt and the cost of equity in proportion to how a project is financed.
E and D are equity and debt values, V = E + D, Re is the required return on equity, Rd the interest rate on debt and Tc the corporate tax rate (interest is usually tax-deductible).
Renewable projects with contracted revenue (a PPA or CfD) typically raise 70 to 85% debt. With debt at 5% and equity at 10%, an 80/20 split and 25% tax gives a nominal WACC of 0.2 × 10 + 0.8 × 5 × 0.75 = 5.0%. Merchant projects carry more equity and higher required returns.
Indicative real after-tax WACC for utility-scale solar and onshore wind (IEA, IRENA, 2023 to 2024): 3.5 to 6% in Germany, France, Spain and the US; 7 to 9% in India and Brazil; often above 10% in sub-Saharan Africa. Higher financing cost explains why identical solar plants can cost two to three times more per MWh in developing countries despite better irradiance.
Because WACC is the discount rate in LCOE calculations, a 1-percentage-point increase raises solar or wind LCOE by roughly 7 to 10%. Rising interest rates from 2022 were a key driver of offshore wind cost overruns and cancelled contracts in the US and UK.
Related terms
All terms →- Discount rate
The annual rate used to convert future costs and revenues into present value, reflecting the time value of money and investment risk.
- 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.
- 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.
- IRR (Internal Rate of Return)
The discount rate at which a project’s net present value equals zero, representing its effective annual return.
- 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.
- Contract for Difference (CfD)
A support scheme or contract in which a generator receives the difference between a fixed strike price and a market reference price, paying back when prices exceed it.