Solar project returns: IRR, NPV, DSCR, LCOE explained

Four metrics summarise the returns of a renewable energy project: IRR, NPV, DSCR and LCOE. Understanding them means speaking the language of banks and investment committees. Here are their definitions, formulas and useful benchmarks.

IRR — Internal Rate of Return

The IRR is the discount rate that sets the NPV of the flows to zero: it is the project's annualised return. Two are distinguished:

• Project IRR (unlevered): return of the asset, excluding financing.
• Equity IRR (levered): return to the shareholder, debt included.

As long as the cost of debt is below the return of the asset, leverage pushes the equity IRR above the project IRR.

NPV — Net Present Value

The NPV is the sum of future flows discounted at a rate reflecting risk: NPV = Σ Flow_t / (1 + rate)^t. A positive NPV means the project creates value beyond the cost of capital. At portfolio level, this is the NAV (net asset value) by sum-of-the-parts.

DSCR — debt service coverage

The DSCR (Debt Service Coverage Ratio) compares the cash flow available to the annual debt service: DSCR = CFADS / (principal + interest). It is the ratio the bank watches:

• DSCR > 1.0×: the cash covers the debt.
• 1.10 to 1.30×: a frequent covenant range depending on risk.
• Sculpted debt calibrates repayment precisely to hold a target DSCR.

LCOE — discounted cost of energy

The LCOE (Levelized Cost of Energy) is the average cost of production over the life: LCOE = Σ(CAPEX + OPEX)_discounted / Σ(MWh)_discounted. If the selling price exceeds the LCOE, the project creates value. It is the competitiveness metric of a technology.

Reading them together

These metrics come from the financial business plan and are computed automatically, project by project and at consolidated level, in Wattvalio.

Beyond the four: MOIC, gearing, LLCR

Three metrics often complete the dashboard:

• MOIC (Multiple On Invested Capital): total distributed to the shareholder ÷ total invested. A MOIC of 2× means equity doubled over the life — complementary to the IRR, which accounts for time.
• Gearing: share of debt in the financing (debt ÷ invested capital). High gearing amplifies the equity IRR… and the risk.
• LLCR (Loan Life Coverage Ratio): debt coverage over the whole life of the loan, not just year by year like the DSCR — a complementary view for the lender.

A worked example in one minute

The best way to grasp these metrics is to vary them. Our solar ROI calculator computes project and equity IRR, NPV, LCOE, DSCR and MOIC live: lower the selling price and watch the DSCR move toward 1.0×; raise the gearing and see the equity IRR climb. That is leverage made tangible.

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