Show Me The Money

Deep Dive: Key Financial Metrics Energy Investing

When you’re investing in energy projects such as solar, storage or EV charging, there are a few different financial metrics that can help assess the project’s viability. The four most common are Simple Payback, Internal Rate of Return (IRR), Net Present Value (NPV), and Return on Investment (ROI). Here’s a quick overview of these metrics and when you might want to use each.

1. Simple Payback

Simple Payback is the time it takes for an investment to recover its initial cost, calculated by dividing the project cost by annual savings. For example, a solar installation that costs $10,000 and saves $2,000 a year has a payback period of 5 years.

Why use it? It’s easy to understand and gives a quick estimate of when your initial investment will be recouped.

Drawback: It ignores the asset’s total lifespan beyond the payback period and doesn’t account for the time value of money.

2. Net Present Value (NPV)

NPV calculates the value of all future cash flows over the project’s lifespan, discounted back to today’s dollars, minus the initial cost. A positive NPV means the investment adds value.

Why use it? It’s ideal for long-term investments as it accounts for both the project’s duration and the time value of money.

Drawback: The result depends on selecting the right discount rate which can be somewhat subjective.

3. Internal Rate of Return (IRR)

IRR is the discount rate at which the Net Present Value (NPV) of all cash flows over the project’s life span equals zero. Essentially, IRR provides the annualised rate of return from the project over its entire life. A higher IRR means a more attractive investment.

Why use it? It considers both the timing of cash flows and the project’s duration.

Drawback: It’s complex for those not fluent in financial speak and can be hard to interpret if cash flows vary over time.

4. Return on Investment (ROI)

ROI measures the total profit relative to the initial cost, expressed as a percentage. It’s calculated as: (Net Benefit / Cost) * 100. For example, if your solar system costs $10,000 and saves you $20,000 over 20 years, your ROI is 100%.

Why use it? It’s simple and provides a quick snapshot of total profitability over the project’s lifespan.

Drawback: It doesn’t consider the timing of returns or the time value of money.

Which Metric Should You Use?

For a quick estimate of payback time, use Simple Payback.

For long-term profitability, IRR and NPV are better as they account for the project’s full lifespan and the time value of money.

For a quick look at overall returns, ROI is helpful, but it’s less precise for long-term projects like solar.

Ultimately, NPV and IRR are best for evaluating energy investments over their full lifespan, while Simple Payback and ROI provide faster but less comprehensive snapshots.

Battery Capex Cost for BTM Projects

Two questions we often hear in the context of battery storage investments, particularly smaller-scale projects located within the distribution network, are:

How cheap do batteries need to be to be “in the money” for any given project?

How much does the battery control strategy matter? On this point there’s often a view that using the battery to maximise self-consumption of solar is the most sensible thing to do, but is it really?

To explore those two questions further, check out this Gridcog blog.

Industry Insights

2024 was the year that negative prices truly arrived in Europe, with all the major markets smashing records and Spain seeing negative prices for the very first time.

New Zealand has seen record high wholesale prices in 2024 ahead of late winter rains causing dam levels to rise and prices to collapse.

Gridcog at Solar and Storage Live in Birmingham

We’ll be at Solar and Storage Live in Birmingham next week, please reach out to our UK team if you’ll be there and are keen to meet up. Don’t miss Laura’s panel discussion on Women in Engineering, and Genna’s presentation on The Value of Flexibility. See you there!

Product Corner: Investment Case Report

Gridcog provides a tonne of different dashboards and reports to allow you to explore and understand your simulations and help you invest in the winning projects with confidence. In this week’s Thinking Energy video, Dan walks through the Investment Case Report, one of the key outputs for securing investment for your project.

Hiring Corner

We’re looking for an Energy Analyst to join our Australian team. If you’re smart, ambitious and a deep energy nerd that enjoys bridging the technical and commercial worlds, or you know someone who is, then check out this role.?

That’s all for this week. If you’d like to see how Gridcog can model your energy projects, click here to book a call with our team.

?Or, if you have any interesting project use-cases you’d like to see modelled in Gridcog, email our marketing magician [email protected] and we’ll spin it up!