Determine Optimal Energy Project for a 10% ROI Target
An energy company is evaluating investments in new renewable projects and must hit a 10% annual return on investment. The company is comparing solar, which has zero variable cost, with an alternative technology that has a $30/MWh variable cost.
For calculation questions, assume:
-
Market price for electricity:
P = $40/MWh
-
Annual fixed operating and maintenance cost:
F = $12.5 million
-
Representative project investment for production sizing:
I = $500 million
-
Annual production cap:
Q_max = 5.0 million MWh
-
Variable cost: solar
v = $0/MWh
; alternative technology
v = $30/MWh
Constraints & Assumptions
-
Use annual profit divided by initial investment as the ROI definition unless you state otherwise.
-
Treat this as a business and analytics case, not a full project-finance valuation.
-
Show units and assumptions clearly so the math can be checked.
-
Distinguish payback period from annual ROI.
Clarifying Questions to Ask
-
Is ROI calculated on accounting profit, cash flow, or net present value?
-
Are tax credits, renewable credits, subsidies, or debt financing included?
-
Is the 5.0 million MWh cap physical, contractual, or market-driven?
-
Should risk, volatility, and regulatory uncertainty change the recommendation?
Part 1 - Select the Project
What qualitative and quantitative factors would you consider when selecting a new energy project?
What This Part Should Cover
-
Revenue, price, contractability, capacity factor, fixed cost, variable cost, capex, subsidies, construction risk, and regulatory risk.
-
Market, operational, ESG, scalability, and portfolio-fit considerations.
-
Sensitivity analysis for price, production, cost, incentives, and curtailment.
Part 2 - Calculate Required Production
If the target is a 10% annual ROI, how many MWh must be produced each year to reach it for the alternative technology?
What This Part Should Cover
-
Annual profit as
(P - v) * Q - F
.
-
ROI as annual profit divided by investment.
-
Solving for required annual production and checking units.
-
Recognition that the expected production requirement is
6.25 million MWh
under the stated assumptions.
Part 3 - Handle the Production Cap
Production is capped at 5.0 million MWh per year. What actions could still deliver a 10% annual ROI?
What This Part Should Cover
-
Quantifying the profit shortfall under the cap.
-
Levers such as higher contracted price, credits, lower capex, lower fixed cost, better availability, storage, incentives, or different project structure.
-
Practicality and risk of each lever rather than a purely algebraic answer.
Part 4 - Compare Breakeven Years
For solar and the alternative technology, calculate years to breakeven and explain why both can be approximately 2.5 years under different investment assumptions.
What This Part Should Cover
-
Annual cash flow for each technology at the production cap.
-
Payback period as investment divided by annual cash flow.
-
Explanation that equal payback can occur only if the higher-variable-cost technology has much lower required investment.
Part 5 - Recommend and Present
Which option would you recommend, and how would you summarize the recommendation to senior management in 30 seconds?
What This Part Should Cover
-
Recommendation grounded in return, risk, feasibility, downside protection, and strategic fit.
-
Clear explanation of trade-offs between solar and the alternative technology.
-
Executive-friendly framing with key numbers and decision criteria.
What a Strong Answer Covers
A strong answer combines clean ROI math, unit checks, cap constraints, sensitivity levers, payback interpretation, and a recommendation that accounts for both financial return and project risk.
Follow-up Questions
-
How would the recommendation change if electricity prices fall to $35/MWh?
-
How would tax credits or renewable energy credits enter the ROI calculation?
-
What risk-adjusted metric would you use if the two projects have different volatility?