GUIDE · SOLAR PROJECT FINANCE

Project IRR vs Equity IRR

Published 2026-10-23 · Reading time about 6 minutes

A solar model usually reports two internal rates of return. They answer different questions, and reading one as if it were the other is one of the most common ways a promising project gets misjudged. This guide explains what each measures, why they differ, and how to use them together with debt coverage.

Project IRR: how good is the asset?

Project IRR (unlevered IRR) uses the cash flows of the project as if it were funded entirely with equity: CAPEX out, then revenue less operating costs and taxes in, over the project life. Financing is deliberately left out, so the result describes the quality of the asset itself: yield, tariff or power price, CAPEX, O&M and degradation.

• Use it to screen sites and designs, to compare alternatives, and to test whether the asset beats a hurdle rate before any financing structure is chosen.
• It is the right number for a CAPEX or tariff discussion with an owner, because it does not depend on who lends the money.

Equity IRR: what does the investor earn?

Equity IRR (levered IRR) uses only the cash flows between the investor and the project: equity contributions, then distributions after debt service. It depends on the debt ratio, interest rate, tenor, repayment profile, construction-period interest, fees and tax treatment of interest.

• Use it when the question is the return on the money the investor actually puts in.
• It moves a lot with financing assumptions, so it must always be read together with the debt terms behind it.

Why the two numbers differ

Leverage replaces some equity with debt. If the project earns more than the after-tax cost of that debt, each unit of borrowed capital adds to the equity return, so Equity IRR exceeds Project IRR. If the project earns less than the cost of debt, leverage works against the investor and Equity IRR falls below Project IRR. The gap is therefore a message about financing, not about the asset.

The published illustrative 10MW demo case shows the pattern: Project IRR 8.3% (unlevered) against Equity IRR 10.6% (levered). The same case has a minimum DSCR of 1.28x (below threshold). These figures are illustrative and not for investment use; see the 10MW demo.

Why Equity IRR alone is not enough: DSCR

A high Equity IRR can coexist with a thin debt-service cushion. The debt service coverage ratio (DSCR) compares cash available for debt service with the debt service due in each period. Lenders commonly look at the minimum and the average DSCR against a covenant level; a low minimum means a small drop in generation, price or a cost overrun can trigger a covenant breach even when the headline return looks attractive. Check the minimum DSCR before relying on a leveraged return.

Which number for which decision

• Is this project worth building at all? Project IRR (and NPV at your discount rate).
• Is this financing structure good for the investor? Equity IRR, together with the debt terms.
• Will the debt hold up under stress? Minimum and average DSCR, plus sensitivities.
• How long until the money comes back? Payback, read as a simple screening figure only.

Common mistakes

• Comparing Equity IRR with a hurdle rate set for project (unlevered) returns, or the reverse.
• Ignoring interest during construction and fees, which lowers Equity IRR and raises the funding requirement.
• Changing the debt ratio to lift Equity IRR without checking minimum DSCR.
• Mixing nominal and real cash flows or discount rates within one model.
• Treating a single-case IRR as a forecast instead of testing CAPEX, price, generation and interest-rate sensitivities.

Try it

The free IRR and payback screening calculator gives a pre-tax, unlevered view in your browser and stores nothing. The Founder Edition model keeps Project IRR and Equity IRR separate, adds the debt schedule, tax, DSCR and sensitivity analysis, and is described on the Founder Edition page.