How do NPV and IRR change your energy project's business case?

Net present value compares project costs with future cash flows expressed in today's money. Internal rate of return is the discount rate that makes NPV equal to 0, as government energy appraisal guidance explains [S1]. Use both alongside simple payback, with consistent assumptions about lifetime, use and replacement. Check the appraisal with your accountant. Checked October 2026.

Last checked 17 October 2026

What is the difference between NPV, IRR and payback?

Use a cash-flow table before choosing an appraisal metric. Government energy guidance describes net present value (NPV), internal rate of return (IRR) and payback as ways to assess energy projects. [S1] Each answers a different question about the same proposed installation.

This is general information, not finance advice. Check with your accountant before using it to approve capital spending. Start with capital and operating expenditure if the quote mixes installation cost with recurring service payments.

How do you calculate NPV and IRR for an energy project?

Write initial capital as a negative amount at the start, followed by each year’s net cash. For a constant end-of-year cash flow, the calculation is:

• NPV = minus initial capital + the sum of annual net cash ÷ (1 + discount rate) raised to each year number.
• IRR = the rate that makes that NPV zero for the same cash-flow sequence.
• Simple annual ROI = annual net cash ÷ initial capital × 100.
• Simple payback = initial capital ÷ annual net cash when the yearly amount stays constant.

The government energy guide explains the discounted appraisal methods. [S1] Use actual dates if payments are irregular, and have your accountant check the spreadsheet. A quote’s headline return cannot replace the underlying cash-flow rows.

What discount rate should your business use?

Choose it with your accountant and record the reason. Treasury’s Green Book discounting guidance concerns social appraisal. [S2] It is useful for understanding present values, but its purpose does not set a private business’s required return.

Keep inflation treatment consistent: a forecast including price inflation needs a rate consistent with those money values. Record the chosen appraisal period and whether cash arrives during or at the end of each year. Do not change the rate between funding offers simply to make one look more attractive.

What could the site earn under each funding model?

This is an illustration, not a quote. All commercial inputs below are assumptions. They are deliberately visible so you can replace them with your own quote and demand evidence.

The effective energy cost includes losses. Fully funded assumes the funder pays all operating costs. Part funded gives the host its sales share and the same share of energy and overheads. Self funded puts all those costs with the host. The model excludes VAT, tax, debt, business rates, replacement and land costs. Those exclusions make this a teaching example; add them to an actual investment appraisal.

Annual energy = sessions × 20 × 365. Total operating net = energy × (£0.50 − £0.25) − £600. Part funded host net = 60% × total net. Fully funded host income = 10% × energy × £0.50.

Ranges use the capital endpoints. For discounted calculations below, use the midpoint host capital of £5,000 for part funded and £10,000 for self funded. The sum of the assumed discount factors is 6.7101: add 1 ÷ 1.08, 1 ÷ 1.08 squared, and so on through the final year.

For example, self funded mid-use NPV = minus £10,000 + £3,050 × 6.7101, or about £10,466. Low use recovers its initial capital in the simple calculation yet has a negative NPV at the assumed rate. Fully funded has no host capital in this illustration, so a capital-based ROI or IRR is not meaningful; compare its yearly income with the value and obligations of committing the bays instead.

How should you test the relationship between returns and risk?

Treasury’s appraisal guidance describes sensitivity analysis and switching values. [S3] Apply that discipline by changing charging demand, import cost, commissioning date and replacement spending separately. Government ESOS guidance also encourages presenting energy measures in business-case terms. [S4]

For solar, use self-consumed generation and exported energy separately. For batteries, model usable energy, losses and replacement assumptions. For charging, test lost parking, downtime and energy deductions rather than relying only on the high-use column. Compare solar and battery ROI with the charging business-case template.

Ask the installer which technical assumptions a site survey must confirm. Ask your solicitor about lease length, liability, removal and exit costs. The appraisal period should not silently assume continued access after your site’s rights end.

Have the site survey confirm power availability, accessible bay layouts and planning requirements. Ask who approaches the distribution network operator (DNO), which manages the local network, for any connection changes. Put confirmed grid and parking costs into the same cash-flow rows as the equipment.

What should you do next?

Bring the cash-flow rows, quote exclusions and demand evidence. Read how we work and get matched with an installer that covers your area. Piggy Pineapple Ltd operates this referral service. We refer enquiries to installer partners and may be paid a fee. Our owner holds shares in at least one partner. Before passing on details, we name the proposed partner and disclose any shareholding our owner holds in it.