How is IRR (Internal Rate of Return) calculated for a solar project?

Internal Rate of Return (IRR) is one of the most common metrics for evaluating whether a solar project makes financial sense, especially for property owners comparing it against other capital investments.

IRR is calculated by estimating two things: the initial all-cash cost of the project, and the total savings over the system's lifetime (typically modeled over 20 years). The initial cost factors in optimal system sizing, current build cost estimates, and available incentives like the federal Investment Tax Credit (ITC). The lifetime savings are based on the building's energy consumption and electricity costs, with conservative assumptions about future electricity price growth.

The IRR is the discount rate that makes the net present value (NPV) of those future savings equal to zero — in other words, it's the effective annual return your investment earns over time. A higher IRR means a stronger financial case.

Many property owners and institutional investors have an internal hurdle rate — the minimum return they require before allocating capital to a project. If a solar project's IRR exceeds that hurdle, it's likely to pencil. Typical commercial rooftop solar IRRs in favorable markets range from 10–20%, depending on system size, local electricity rates, available incentives, and net metering policies.

IRR is useful for apples-to-apples comparisons across different project types and investment opportunities, but keep in mind it doesn't capture everything — it doesn't account for risk, ongoing maintenance costs, or the non-financial benefits like carbon reduction and energy independence.