– Internal Rate of Return and how
it affects the development of city-wide DH pro jects
IRR is a theme discussed everywhere when looking at establishing DH systems – the IRR concept is still to be understood in detail in the industry. Still, it is an essential part of understandings the effect on the rollout of city-wide networks. All cities planning to enjoy the benefits of DH must understand what the IRR means and how a low or a high level of IRR will affect the rollout of DH. Not least how high IRR requirements will limit, if not jeopardize, city-wide expansions of DH.
Morten Jordt Duedahl, Business Development Director, DBDH and Lars Gullev, Managing Director, VEKS
The critical part is how the DH company is structured – the technical design is assumed to be the same. A well-chosen business model will lead to success. The conclusion is to pick the low-hanging fruits first but be sure to do it in the right way. Otherwise, a city may never be able to reap all the fruits availa- ble (the ultimate goal). The entire city – not only small selected areas This article assumes that it is insufficient to make green heat transitions in smaller city areas. The ambition must be to en- sure that the entire city can enjoy the benefits of green afforda- ble heating solutions in the future. And here, district heating is an obvious (if not the only solution) in small, large, and mega cities.
Internal Rate of Return - IRR Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential in- vestments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does. In the DH industry IRR is used as a simple (maybe not always 100% correct) tool to compare the economic viability of a project. We recognise that it is not abso- lutely theoretical correct, but also recognise that IRR creates the best common understanding of a project’s economic viability.
This is a re-write of an article published in 2019 in Hot Cool. The articles have created a lot of attention and a lot of discus- sion. The authors have decided to divide the original article into two separate ones – both are published in this magazine. The articles both circle around IRR and the understanding of the effects on DH. One article discusses the effect of different expectations to IRR (this one) and another discussing how a municipal lead DH company can benefit from picking the low hanging fruits in the right way and how making the decision on choice of business model must be made from early on. This article is called IRR – Internal Rate of Return and how it affects the development of DH projects. You will find it on page 12 in this magazine.
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