Core IRRs for 100 renewables projects are calculated in this 15-page report. Past renewables returns have averaged 5% for solar, 6% for wind. But recent solar returns have reached 8-11%, due to cost deflation. Solar growth will therefore continue, even as policy support softens? And could this put pressure on power prices if load growth disappoints?
The IRRs achieved by renewables projects have always been somewhat mysterious. Renewables returns are not disclosed publicly. But they can be estimated from reported PPAs.
Our goal in this 15-page report is to estimate renewables returns, to understand the kinds of IRRs being achieved at solar, wind and offshore wind projects, and as a contrast to our other economic models.
Our methodology for estimating the IRRs at past projects, based on their PPAs, capex costs, locations and development vintage, is explained on pages 2-6.
Core IRRs of 5-6% are found at the project level. This seems low, but can be uplifted to 10-20% equity IRRs, by skilled project developers, optimizing financial and operational parameters, and especially for solar, as shown on pages 7-8.
The biggest support for renewable IRRs in the past has been government policies. This has come in the form of generous strike prices, CfDs or tax incentives, as discussed on page 9.
Without policy support, a large number of the projects in our database would have failed to generate positive IRRs at all. Hence renewables are generally vulnerable to a policy backlash, as discussed on page 10.
Yet most interestingly, our database implies that core IRRs have been progressively improving for utility-scale solar projects, mainly due to continued solar cost deflation.
Some commentators may look at these numbers and question whether renewables still need policy support, or whether this is stoking an overbuild.
Solar capacity under development in the US has risen by 50% in the past year, and now comprises 60% of all new US power generation capacity under development.
Even with less policy support, we can see solar getting overbuilt, potentially pressuring power prices in a world of slower load growth. Our conclusions, and updated wind and solar forecasts, are presented on pages 12-15.