IRR

What is IRR

Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of a project’s cash flows equals zero. It is the standard return metric in project finance and the headline number investors use to evaluate solar projects. IRR captures both the absolute return and the timing of cash flows in a single percentage.

IRR is calculated iteratively from the cash flow stream: capex outflow at year zero, annual operating cash flows over the project life, and any salvage value at end of life. The discount rate that makes the present value of all flows sum to zero is the IRR. Our Solar IRR and Payback for C&I in India piece walks through this math on a real project.

For Indian solar, project IRR typically ranges 10 to 18 percent for utility plants, 14 to 22 percent for C&I rooftop, and 18 to 30 percent for residential rooftop with PM Surya Ghar subsidy. Higher IRR reflects favourable tariff, low capex, high yield and short payback.

IRR explained simply

You invest in a solar plant today. Over 25 years it generates cash. IRR tells you the equivalent annual percentage return on your investment. If the IRR is 14 percent, the project is generating returns equivalent to a 14 percent annual investment.

The bigger the IRR, the better the project for investors.

Why IRR matters

Investment decision. Investors compare IRR to their hurdle rate, typically anchored to WACC or the project’s discount rate.

Project ranking. Multiple projects compared head-to-head.

Lender confidence. Project IRR informs debt service capability.

Risk assessment. Sensitivity of IRR to assumptions reveals project robustness.

PPA negotiation. Tariff levels must support target IRR.

Capital allocation. Within renewables portfolios, IRR drives capital flow.

How IRR is calculated

Where:

• CF_t = net cash flow in year t (negative for capex, positive for operating cash flow)
• r = discount rate
• T = project life

IRR is the r at which NPV = 0. Solved iteratively, no closed-form solution.

Technical deep dive

Project IRR vs Equity IRR

Equity IRR is higher because debt leverage amplifies equity returns when project IRR exceeds debt cost.

IRR drivers (Indian utility solar)

Indian solar IRR benchmarks (2026)

IRR vs WACC

For a project to create value, IRR must exceed WACC. Typical Indian utility solar WACC: 8 to 10 percent. IRR of 11 to 14 percent leaves a margin of about 3 percentage points at the midpoints (12.5 versus 9 percent), and anywhere from 1 to 6 points across the full ranges.

Real-world applications

Developer go/no-go decisions on tender bids.

PPA tariff floor setting.

Bank loan structuring.

Residential customer payback evaluation.

C&I solar procurement model selection (CAPEX vs RESCO), including choosing between on-grid and hybrid inverter configurations that affect the return profile.

Sustainability investment portfolio allocation.

Advantages

Single percentage easy to communicate.

Standardised across industries.

Captures time value of money.

Comparable across project sizes.

Limitations

Assumes reinvestment at IRR rate.

Multiple IRRs possible for unconventional cash flows.

Sensitive to assumptions, especially terminal value.

Less intuitive than payback for some audiences.

Does not show absolute return scale.

Common problems

IRR sensitive to ALMM premium and module price volatility.

Curtailment risk reducing project IRR below hurdle rate.

Late payment surcharge from DISCOMs eroding IRR.

OPEX escalation eating into IRR over 25 years.

End-of-life decommissioning cost ignored, overstating IRR.

Best practices

Use realistic P50 yield with appropriate degradation.

Stress-test IRR under low yield, high opex and DISCOM payment delay scenarios, ideally inside solar financial modeling software rather than a static spreadsheet.

Compare to WACC and hurdle rate.

Report both project and equity IRR.

Document all key assumptions.

Use post-tax IRR for realistic investor return.

Comparison: IRR by financing structure

Indian market context

SECI utility solar tender economics target project IRR of 11 to 14 percent.

C&I RESCO developers target equity IRR of 16 to 20 percent on commercial rooftop installations.

PM Surya Ghar residential customers see IRR of 20 to 30 percent post-subsidy due to capex reduction.

CERC Tariff Regulations 2024 use IRR-based methodology for benchmark tariff setting.

Lender hurdle rates for solar projects have come down from 13 to 14 percent in 2015 to 10 to 12 percent in 2025.

Standards and certifications

Common mistakes

Confusing project and equity IRR.

Ignoring degradation in cash flow projections.

Treating subsidy as discount rather than upfront grant.

Using nominal vs real IRR inconsistently.

Underestimating O&M cost escalation.

Skipping sensitivity analysis.

Not stress-testing under DISCOM payment delay.

Key takeaways

IRR is the annual return metric for solar projects, calculated as the discount rate that zeros project NPV. Indian utility solar IRR sits at 11 to 14 percent project, 14 to 18 percent equity. C&I rooftop 14 to 22 percent. Residential with PM Surya Ghar 20 to 30 percent. IRR is sensitive to capex, yield, tariff and degradation assumptions. Should be compared against WACC and hurdle rate.

Further reading

For how IRR plays out in real projects, these guides go deeper:

• Solar Investment vs Fixed Deposit, Which Wins?
• Solar IRR and Payback for C&I in India, Real Math
• How to Evaluate Solar Inverter Reliability, Qbits Research

Sources

• CERC Tariff Regulations 2024.
• NREL System Advisor Model (SAM) documentation.
• IRENA Renewable Power Generation Costs in 2024.
• IEA Projected Costs of Generating Electricity 2024.
• Brealey, Myers and Allen, Principles of Corporate Finance, McGraw-Hill.
• SECI Tender Documents.
• Indian Renewable Energy Development Agency (IREDA) financing parameters.
• BloombergNEF Solar PV Cost Trends 2024.
• IEA Renewables 2024.