What is the difference between project IRR and equity IRR?

Project IRR measures the return of the asset before financing (no debt); equity IRR measures the return to the shareholder after debt service. Leverage lifts the latter whenever the cost of debt is below the project IRR.

What is the DSCR and what value should you target?

The DSCR (debt service coverage ratio) is a year's CFADS divided by that year's debt service. It is the covenant the bank watches; the target is often between 1.10× and 1.30× depending on the offtake risk.

Why does the bank use P90 rather than P50?

P90 is a conservative output achieved 9 years out of 10: the bank uses it to make sure it is repaid even in a bad year. P50 (the median) is the base case for the return shown to the shareholder.

Does the LCOE give a zero NPV directly?

No. The LCOE is a discounted average cost, excluding taxes and computed over the whole life; a tariff equal to the LCOE does not make the post-tax NPV exactly zero. The true break-even tariff (NPV = 0) is slightly higher to cover corporate tax.

GLOSSARY · 43 TERMS

Renewable energy project finance glossary

The key terms of the renewable energy business plan and financing, each defined in a sentence or two. Returns, bankable debt, valuation, offtake contracts, generation and taxation — the vocabulary of a bankable dossier, in one place.

RETURNS · CASH FLOW

Returns & cash flow

Project IRR (unlevered)IRR: The discount rate that makes the project's NPV zero before financing — hence independent of debt. It measures the intrinsic return of the asset (pre- or post-tax depending on the convention).See also: NPV, Equity IRR, WACC
Equity IRR: The discount rate that makes the NPV of the cash flows to the shareholder zero, after debt service. Leverage lifts it whenever the cost of debt is below the project IRR.See also: Project IRR, Gearing, MoM / MOIC
NPV (net present value)NPV: The sum of future cash flows discounted at a given rate, net of the initial investment. A positive NPV means the project creates value at that rate.See also: WACC, DCF
Payback period: The number of years after which cumulative cash flows repay the investment. Either simple (undiscounted) or discounted.
WACC (weighted average cost of capital): The weighted average of the cost of debt and the cost of equity. Used as the reference discount rate for a project's NPV.See also: NPV
MoM / MOIC (multiple on invested equity): The ratio of total cash received by the shareholder to the equity invested. A 2.0× MOIC means doubling the stake over the asset's life.See also: Equity IRR
CFADS (cash available for debt service): EBITDA adjusted for taxes, working-capital changes and reserves: the cash on which the bank computes the DSCR.See also: DSCR, EBITDA
EBITDA: Revenue less operating costs (OPEX), before depreciation, financing costs and taxes. The basis for the operating margin and valuation multiples.
LCOE (levelized cost of energy): The average cost of one MWh over the asset's whole life: (discounted CAPEX + OPEX) ÷ (discounted energy produced). The minimum tariff that just covers costs, excluding taxes.See also: NPV

DEBT · FINANCING

Debt & financing

DSCR (debt service coverage ratio): A year's CFADS divided by that year's debt service (interest + principal). A core banking covenant; the target is often between 1.10× and 1.30× depending on offtake risk.See also: CFADS, LLCR, Debt sculpting
LLCR (loan life coverage ratio): The present value of CFADS to debt maturity divided by outstanding debt. A whole-of-tenor view complementing the annual DSCR.See also: DSCR
Gearing (leverage): The share of debt in total financing (e.g. 80% debt / 20% equity). Higher gearing amplifies the equity IRR — and the risk.See also: Equity IRR, DSCR
Debt sculpting: A repayment profile calibrated to hold a target DSCR constant each year, rather than level annuities. It maximises the debt the project can sustain.See also: DSCR
DSRA (debt service reserve account): A blocked account pre-funding a few months of debt service, required by lenders as a safety buffer.
Senior debt: Priority bank debt, repaid before other financing. The core of a renewable project's funding.See also: Project finance, Crowdfunding / participatory debt
Covenant: A contractual loan undertaking (minimum DSCR, distributions locked below a threshold, ratios to observe). A breach can freeze distributions to the shareholder.See also: DSCR
IDC (interest during construction): Interest accruing on the debt during construction, before commissioning. It is capitalised into the project cost rather than paid in cash immediately.
Balloon (bullet repayment): A large portion of principal repaid in one go at maturity, often refinanced. It may require a shareholder injection to smooth cash in the repayment year.
Project finance: Financing backed by the project's cash flows alone, with no recourse to the shareholder's balance sheet, through a dedicated company (SPV).See also: SPV, Senior debt
Crowdfunding / participatory debt: Complementary financing raised from the public (bonds, participatory loans), usually subordinated to the senior debt.See also: Senior debt

VALUATION

Valuation

NAV (net asset value): The net value of an asset or portfolio: the sum of asset valuations, less net debt. Often obtained via SOTP.See also: SOTP, DCF
SOTP (sum of the parts): A valuation method adding up the value of each asset (often by DCF) to reach the portfolio's value.See also: NAV, DCF
DCF (discounted cash flow): Valuing an asset as the sum of its future cash flows discounted at a rate reflecting its risk.See also: NPV, NAV
Due diligence: An in-depth review (technical, legal, financial) run by a buyer or lender before a transaction or financing.

REVENUE · CONTRACTS

Revenue & contracts

Feed-in premium (French CRE): In France, public support from the energy regulator's tenders: it tops up the market price to an indexed reference tariff, over roughly 20 years.See also: PPA, Merchant, Indexation
PPA (power purchase agreement): A bilateral electricity sales contract with an offtaker (corporate or trader), at a fixed or indexed price, over a long tenor.See also: Feed-in premium, Merchant
Merchant (market sales): Selling electricity at the market price (spot or a forward price curve), with no guaranteed contract: higher potential return, far higher price risk.See also: PPA
Curtailment: A voluntary or imposed reduction of output (grid saturation, negative prices). A revenue loss that must be modelled explicitly.
Guarantees of origin (GOs): Certificates attesting the renewable origin of electricity, sellable separately from the energy and forming an additional revenue stream.
Indexation: The annual revision of a tariff or cost against an index (inflation, the French CRE's L coefficient). A wrong indexation assumption distorts returns over 20–30 years.See also: Feed-in premium

GENERATION

Generation

P50 / P90 / P75: Generation scenarios by probability of being exceeded: P50 = median (the business plan's base case), P90 = conservative (basis for debt sizing), P75 = intermediate.See also: Energy yield, DSCR
Energy yield: The expected annual energy (in MWh), a function of irradiation or wind resource, installed capacity and the performance ratio.See also: P50 / P90 / P75, Performance Ratio
Capacity factor: The ratio of energy actually produced over the year to the theoretical energy at full power. An indicator of resource quality.
Degradation: The annual decline in module efficiency (often 0.4–0.7%/yr for PV), applied over the whole asset life.
Performance Ratio (PR): The ratio of energy actually exported to theoretical energy, measuring system losses (cabling, inverters, temperature, soiling).

FRENCH TAX

French taxation

IS (corporate income tax): Tax on the project company's taxable profit, after offsetting carried-forward losses from prior years.See also: Loss carry-forward
CVAE: A French local business tax on value added (being phased out gradually).
IFER: A flat network-business tax due by electricity generation plants based on their capacity. Omitting it overstates a project's returns.
C3S: A French solidarity social contribution levied on turnover above a threshold.
Loss carry-forward: A tax mechanism letting early-year losses (heavily depreciated) offset future profits, deferring the corporate tax charge.See also: IS

STRUCTURE

Legal structure

SPV (special purpose vehicle): A dedicated company holding a single asset or project, ring-fencing its risks and debt. The building block of project finance.See also: Project finance, Holding company
Holding company: A company holding stakes in several SPVs, where portfolio cash flows and valuation are consolidated.See also: SPV, Consolidation
Consolidation: Aggregating the accounts and cash flows of the SPVs at holding level, with intragroup eliminations, for a portfolio view.See also: Holding company

Frequently asked questions

What is the difference between project IRR and equity IRR?: Project IRR measures the return of the asset before financing (no debt); equity IRR measures the return to the shareholder after debt service. Leverage lifts the latter whenever the cost of debt is below the project IRR.
What is the DSCR and what value should you target?: The DSCR (debt service coverage ratio) is a year's CFADS divided by that year's debt service. It is the covenant the bank watches; the target is often between 1.10× and 1.30× depending on the offtake risk.
Why does the bank use P90 rather than P50?: P90 is a conservative output achieved 9 years out of 10: the bank uses it to make sure it is repaid even in a bad year. P50 (the median) is the base case for the return shown to the shareholder.
Does the LCOE give a zero NPV directly?: No. The LCOE is a discounted average cost, excluding taxes and computed over the whole life; a tariff equal to the LCOE does not make the post-tax NPV exactly zero. The true break-even tariff (NPV = 0) is slightly higher to cover corporate tax.

To go further, see the guides on IRR, NPV, DSCR, LCOE, portfolio valuation and the bankable financing dossier.

PUT IT INTO PRACTICE

Build this business plan in Wattvalio.

P50/P90 generation, offtake contracts (feed-in, PPA, merchant), debt, taxes, NAV valuation — from a single asset to the consolidated portfolio, with bankable figures.

Request a demo See the product

Or estimate returns with the free calculator →