A Little More On IRR and EIRR

For non-financial readers looking to understand Internal Rate of Return (IRR), which I used as the foundation for Energy Internal Rate of Return (EIRR) in my article Managing the Peak Fossil Fuel Transition, you can find a good discussion of IRR on Wikipedia.

In practical terms, IRR is nearly always calculated in a spreadsheet from a column of numbers indicating the directional cash flows (negative for investment, positive for returns.)

The Excel spreadsheet I used to estimate the IRRs of various generation technologies is available here.

Tom Konrad

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3 Comments

  1. [...] A useful tool for making these sorts of comparisons is Energy Return on Energy Invested (ERoEI), which is the ratio of the energy put into a process to the energy embodied in the products. ERoEI is useful in large part because there is a fairly extensive body of ERoEI analysis for various fuels. In general, if two processes use the same feedstock, the one with the higher ERoEI is likely to be the most economic. This comes with many caveats, however, since it does not take into account the different qualities of the fuels (can you really compare high-grade energy such as electricity to low grade energy such as heat?) Further, ERoEI does not take into account the timing of the energy flows. A process with an ERoEI of 1.1 may be better than a process with an ERoEI of 2, if the first process takes only a day and can be repeated every day, and the latter process takes a year. I looked at a way to account for thetiming of energy flows with a measure I call EIRR here and here. [...]

  2. Robin said

    The problem I see with EIRR is that unlike IRR where there is an interest rate, it’s hard to see how energy can have an interest rate: 1kg of coal today has the same energy now as it will have in 10 years time.

    • Tom said

      Why do interest rates exist? They exist because humans discount the future: we desire to have anything of value today (be it money, food, or a romantic evening with the partner of our choice) more than we value it a year from now.

      Interest rates arise because most investors demand some recompense for forgoing the use of their money today, and the interest is the payment for that.

      Moving to energy, a gallon of gas or pound of coal today is more appealing to an energy user than the same gallon of gas or pound of coal if it were to be delivered a year from now. Hence it makes sense to have interest rates for energy as well, and, in fact, the futures market does set implicit interest rates for various energy commodities.

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