The Development Premium: A 208% IRR That Is Not What It Looks Like
A developer spends $8m over four years taking a 200 MW solar project from a land option to ready-to-build. It sells at the top of the market range — $200,000 per MW, or $40m.
IRR on development spend 207.9%
Multiple 5.00×
Those numbers are real and they are not what they appear to be. The same $40m premium covers exactly four failed projects of equal spend. A developer with a twenty percent hit rate — one project in five reaching ready-to-build — earns precisely nothing on that trade.
Development returns are portfolio returns computed on the survivors. Quote them per successful project and they look extraordinary; quote them per dollar of development capital deployed and they look like a normal business with normal risk.
This post covers what the premium actually is, the stage-gate value curve, the hit-rate arithmetic that makes sense of it, and the farm-down decision it produces.
ℹ️ Note: Market ranges vary widely by geography, technology, market and vintage. Figures are labelled assumptions except where attributed.
What Is the Development Premium?
The price a buyer pays above sunk cost for a project that has been de-risked. It compensates the developer for capital spent, time taken, and — most importantly — for the projects that did not make it.
It is not a payment for the asset. The asset does not exist yet. It is a payment for the removal of uncertainty: site control, interconnection position, permits, offtake and an executable construction plan, each of which had a probability of failure when development began and no longer does.
The Stage-Gate Value Curve
| Stage | Typical premium | What has been de-risked |
|---|---|---|
| Early stage | $20,000–35,000/MW (Europe ex-Germany) $0.02–0.05/W (US) |
Land position, initial screening |
| Mid stage | — | Interconnection queue position, early permits |
| Ready-to-build | up to $160,000/MW (Europe, with co-located storage) $0.07–0.20/W (US) |
Everything: permits, interconnection agreement, offtake, EPC |
Converting the US figures: $0.02–0.05/W is $20,000–50,000 per MW and $0.07–0.20/W is $70,000–200,000 per MW. The two markets tell the same story, which is reassuring — a roughly four-fold uplift from early stage to ready-to-build.
Set that against the cost of the project itself. Between notice to proceed and permission to operate, a typical 100 MW utility-scale solar project carries $1.1m to $1.4m per MW of installed cost on 2026 benchmarks. So a ready-to-build premium of $200,000/MW is roughly sixteen percent of total project cost, paid for work that produced no physical asset at all.
That ratio is the thing to hold onto. Development is not a small preliminary activity attached to a construction project. It is a substantial share of the value, created entirely by removing risk.
What Actually Drives the Uplift?
The gates, in roughly descending order of value contributed.
Interconnection. By a wide margin the most valuable and the least controllable. Series C set out why: a cluster study takes years, costs are allocated by processes involving parties the developer has no relationship with, and the exemption thresholds exist because the numbers move. A project with an executed interconnection agreement and a known network upgrade cost has resolved the single largest uncertainty in the development process.
Offtake. A signed PPA with a creditworthy counterparty converts a merchant asset into a financeable one, and the difference in debt capacity alone — as the merchant tail post quantified — is worth a great deal.
Permits. Binary, slow, and subject to challenge. Their value is in the elimination of a tail risk rather than in anything they produce.
Site control. Necessary rather than sufficient, and since Order 2023 it has to be 90% secured before the interconnection request is even filed — which moved a real cost earlier in the process and removed much of the cheap optionality that used to exist at this stage.
An executable EPC plan. A contractor, a price and a schedule, which is what turns a permitted project into one somebody can actually finance.
Note that four of those five are things the previous two series treated as risks. The development premium is, quite precisely, the market price of having resolved them.
The Hit Rate Is the Whole Calculation
Here is where per-project returns become misleading.
| Sale price | Proceeds | IRR | Multiple | Failed projects covered |
|---|---|---|---|---|
| $70,000/MW | $14,000,000 | 65.4% | 1.75× | 0.8 |
| $120,000/MW | $24,000,000 | 134.2% | 3.00× | 2.0 |
| $200,000/MW | $40,000,000 | 207.9% | 5.00× | 4.0 |
The right-hand column is the one that matters. At $200,000/MW the premium funds the successful project's costs and four failures of equal size. So:
Hit rate needed to break even at $200,000/MW = 1 in 5 (20%)
Hit rate needed at $120,000/MW = 1 in 3 (33%)
Hit rate needed at $70,000/MW = 1 in 1.8 (57%)
A developer achieving a 20% hit rate and selling at the top of the range earns a zero economic return. One achieving 40% at the same price earns a genuinely excellent one. And one achieving 20% while selling at $70,000/MW is losing money steadily, on a per-project IRR of 65%.
This is why per-project development returns should never be quoted without a hit rate, and why they are almost always quoted without one. The number is not wrong; it is computed on a sample selected for success.
The related discipline is the one the interconnection post applied to queue costs: a development budget should carry cost per successful project, which is total spend divided by the hit rate, not spend per project attempted.
What Kills Projects, and When?
The hit rate is not a single number applied uniformly. It is the product of survival probabilities at each gate, and knowing where the attrition happens determines where to spend and when to stop.
Interconnection is the largest killer, and it kills late. A project can survive land acquisition and permitting and then receive a cluster study assigning network upgrade costs that make it uneconomic. As the network upgrades post established, that number arrives years into the process, after most of the development spend has been committed, and it moves with other parties' decisions. This is the worst possible shape for a risk: large, late and exogenous.
Permitting kills earlier and more visibly. A refused or challenged permit is a discrete event with a knowable timeline, and a developer can usually form a view on the probability before committing the interconnection deposits.
Offtake failure kills in the middle. A project that cannot find a PPA at a price supporting the capital cost is not dead — it can wait, or go merchant — but it is stalled, and stalled projects consume option premiums, land payments and queue deposits without progressing.
Land and title issues kill early and cheaply, which is the only good thing about them.
The practical consequence is the abandonment discipline. Because the largest risk resolves late, a developer's expected value calculation deteriorates sharply in the period between committing interconnection deposits and receiving the study result — and that is precisely the window in which sunk-cost reasoning is strongest and abandonment feels most wasteful.
A portfolio's hit rate is determined more by how quickly it kills bad projects than by how many good ones it finds. A developer that abandons at the right gate recycles capital into the next attempt; one that funds a stalled project for three additional years while hoping has converted a cheap failure into an expensive one, and that is where hit rates go.
Sell at Ready-to-Build, or Build and Hold?
The decision every developer faces, and it is a capital efficiency question rather than a returns question.
SELL AT RTB
Capital deployed $8,000,000
Proceeds $40,000,000
IRR 207.9%
Capital freed for the next project $40,000,000
BUILD AND HOLD
Further equity required $67,883,125
Equity IRR from the Series E structure 15.07%
Capital committed for 20 years
Both are good returns. They are not remotely comparable as uses of capital.
Selling at ready-to-build turns $8m into $40m in four years and returns every dollar for redeployment into the next development. Building and holding requires an additional $67.9m — eight times the development spend — to earn a fifteen percent return over two decades.
That difference explains the structure of the industry almost entirely.
Pure developers farm down. Their scarce resource is capital, their comparative advantage is development, and the return on development capital exceeds the return on ownership capital by an order of magnitude. Holding assets would consume the capital that funds the next twenty projects.
Utilities and infrastructure funds hold. Their capital is abundant and long-dated, their comparative advantage is balance sheet and operations, and a stable fifteen percent on a large amount is precisely what they are trying to buy. They are natural buyers of exactly what developers are natural sellers of.
There is a caveat to the capital efficiency argument that developers sometimes discover late. The 208% return is only repeatable while there are projects to develop, and development capacity is constrained by things money does not immediately solve — interconnection queue windows, land availability in viable zones, permitting bandwidth, and people who have done it before. A developer that farms down everything and cannot deploy the proceeds fast enough is earning 208% on a shrinking base, which over a full cycle can underperform a lower return on capital that stays invested.
That is the real argument for retaining assets, and it is not a returns argument at all. It is about what the capital does between projects. A developer with a deep pipeline and a genuine constraint on capital should sell; one whose constraint is deal flow rather than funding is in a different position, and holding an operating asset earning fifteen percent beats holding cash earning four while waiting for a queue window.
Hybrid developers do both, selectively — retaining a minority stake to keep exposure to assets they believe are mispriced, or selling a majority while retaining an asset management role. The retained stake is often less about returns than about demonstrating conviction to the buyer.
The framing that resolves most internal arguments is the one from the first post in this series: compare returns on the capital that is actually scarce. For a developer that is development capital, and nothing in an operating asset competes with it.
What Does the Buyer Think It Is Buying?
Worth taking seriously, because the premium is revenue to one side and a cost to the other — and the buyer's model has to clear its own hurdle after paying it.
A buyer acquiring ready-to-build adds the premium to project cost. On the worked numbers, $40m on a $250m build takes total investment to $290m, and the project IRR falls accordingly. So the buyer is paying for de-risking and must believe the risk removed was worth more than the price of removing it.
Three things it is actually underwriting.
That the de-risking is real. An "executed interconnection agreement" and "a queue position with a favourable cluster study" are very different things, and the gap between them is most of the premium. Buyers with experience price the difference carefully; buyers without it sometimes pay ready-to-build prices for mid-stage projects.
That the assumptions transfer. The seller's energy yield assessment, basis assumption and capture rate all become the buyer's, and everything in Series C says those are the numbers most likely to be optimistic. A buyer accepting the seller's revenue case without rebuilding it is buying the premium and the assumptions together.
That nothing resets on change of control. A PPA with a change of control consent, an interconnection agreement requiring assignment approval, a permit conditioned on the original applicant — each is a way for de-risking to partially unwind at the moment of sale.
The buyer's discipline, and it mirrors the seller's, is to price the premium against what it would have cost to develop the same project, adjusted for its own hit rate. A utility with no development capability is buying something it cannot make and should expect to pay for it. One with a development arm is comparing a certain $40m against an uncertain internal cost of roughly the same size — and should be clear about which it is doing.
How Is a Farm-Down Actually Structured?
Rarely as a single payment, because the buyer wants the seller's incentives to survive the closing.
Staged consideration ties payments to milestones — a portion at signing, a portion at notice to proceed, a portion at commercial operation. This keeps the developer engaged through the transition and reduces the buyer's exposure to a project that turns out less ready than represented.
Earn-outs link part of the price to outcomes: achieved capacity, a performance test result, or an energy yield in the first operating years. They are the buyer's answer to the assumption-transfer problem above — if the seller's yield assessment is right, it gets paid.
A retained minority stake keeps the developer exposed. Buyers often prefer this to an earn-out because it aligns on everything rather than on one measured variable, and developers accept it because it signals conviction. It also, as the returns posts noted, changes the developer's reported returns considerably by converting a clean exit into a mixed one.
A development services agreement keeps the developer working on the project after the sale, paid as a fee. This is frequently where the real negotiation happens: a lower headline price with a generous services agreement and a lower one with none are very different deals, and only the first number gets reported.
Warranties and indemnities, backed by escrow or insurance, cover the representations about permits, title and contracts. W&I insurance has become common enough in this market that its cost is a line in the pricing rather than a negotiating point.
The general observation is that a farm-down headline price is about as informative as a sponsor IRR. What matters is the payment schedule, what is conditional, what services are attached, and what the developer retains — and those four items routinely move the economics more than the headline does.
How Do You Model Development Economics in Excel?
As a portfolio, not a project, with the hit rate as the central input.
The single project
Development_Spend by stage and year
Exit_Price = $/MW × Capacity
PF_DevelopmentIRR = IRR(−spend, proceeds at exit)
PF_DevelopmentMOIC = Proceeds / Total_Spend
The portfolio, which is the real answer
PF_CostPerSuccess = Total_Spend_All_Projects / Projects_Reaching_RTB
PF_BreakevenHitRate = Total_Spend_Per_Project / Exit_Price
PF_PortfolioReturn = (Successes × Exit_Price − All_Spend) / All_Spend
On the worked numbers, the breakeven hit rate at $200,000/MW is 20% and at $70,000/MW is 57%. Publishing that single figure converts a 208% headline into a testable business proposition.
The stage-gate decision tree
For each gate: Spend_to_Pass, P(Pass), Value_if_Passed, Value_if_Failed
Expected_Value = Σ over paths of P(path) × Value(path) − Spend
Abandon if Expected_Value_of_Continuing < 0
The most valuable output of this is not the expected value. It is the abandonment threshold — the point at which further spend is not justified — because the most expensive mistake in development is not a project that fails, it is a project that fails slowly.
The sell-or-hold comparison
Return on development capital $8m → $40m over 4 years 207.9%
Return on ownership capital $67.9m at 15.07% over 20 years
PF_CapitalEfficiencyRatio = Development return / Ownership return
ℹ️ Note: Never compare a development IRR to an ownership IRR without noting how much capital each consumes. A 208% return on $8m and a 15% return on $67.9m are both good and only one of them is repeatable eight times with the same capital.
To build the stage-gate tree, the portfolio hit-rate economics and the sell-or-hold comparison, prompt Dezzmond with your development budget and pipeline.
What Do Developers and Buyers Actually Check?
- What is the hit rate, and what breakeven premium does it imply?
- Is the development budget stated per project or per success?
- What has actually been de-risked — interconnection agreement executed, or queue position only?
- Is there a signed PPA, and with whom?
- At which gate should this project be abandoned if the next milestone is missed?
- Does the buyer's price reflect the same de-risking the seller believes it delivered?
- Is the comparison between selling and holding made on capital efficiency, not on IRR?
Frequently Asked Questions
What is a development premium?
The amount a buyer pays above the developer's sunk cost for a de-risked project. It compensates for capital and time spent, and for the projects in the same pipeline that never reached a sale.
How large is it?
Roughly $20,000–35,000 per MW at early stage in Europe ex-Germany, rising to as much as $160,000 per MW for ready-to-build with co-located storage. US figures are comparable: $0.02–0.05 per watt early, $0.07–0.20 per watt late, or $20,000–200,000 per MW.
Why are development IRRs so high?
Because they are computed on projects that succeeded. A $200,000/MW premium on a $40,000/MW cost base is a 5× multiple — and it covers exactly four failed projects, so a 20% hit rate produces a zero economic return.
Should a developer sell or hold?
It depends which capital is scarce. Selling ready-to-build turns $8m into $40m and frees it for redeployment; holding requires a further $67.9m for a fifteen percent return over twenty years. Developers sell, balance sheet owners buy, and both are behaving correctly.
How is a farm-down usually structured?
Rarely as one payment. Staged consideration tied to milestones, earn-outs linked to capacity or yield, a retained minority stake, a development services agreement, and warranty cover backed by escrow or insurance. The headline price is often the least informative of those.
Where do projects actually die?
Interconnection is the largest killer and it kills late, after most development spend is committed. Permitting kills earlier and more visibly; offtake failure stalls rather than kills. A portfolio's hit rate depends more on abandoning bad projects quickly than on finding good ones.
What drives most of the uplift?
Interconnection, by a wide margin — an executed agreement with known network upgrade costs resolves the largest and least controllable uncertainty in the development process.
Closing: A Return Computed on the Survivors
The 208% is real. The project was developed, it was sold, and the money arrived. Nothing about the calculation is wrong.
It is simply computed on one project out of a pipeline, and the ones that did not reach a sale are not in the denominator. That makes it the same class of number as a fund quoting its best deal, or a trader quoting a winning position — accurate, and not a description of the business.
The honest version requires one additional figure, and every developer already knows it: the hit rate. With it, a $200,000/MW premium and a 20% hit rate is a business earning its cost of capital and no more, while the same premium at a 40% hit rate is an exceptional one. Without it, both look identical and both look extraordinary.
That number also reframes the sell-or-hold question, which is otherwise argued endlessly on returns that are not comparable. A developer's scarce resource is the capital that funds the next project, and nothing about owning an operating asset competes with redeploying into development at these multiples — which is why the industry is structured the way it is, with developers selling and balance sheets buying, and why the arrangement is stable rather than a sign that one side is mispricing.
The next post takes the number the buyer relies on when it pays that premium: P50, P90 and P99 energy yield, and what each actually means.
Sources: Sunraise Capital — Solar Construction Bridge Financing: NTP-to-PTO Loan Pricing 2026 · Megaproject — Why UK Solar M&A Is Moving Toward Ready-to-Build PV Assets · Ascend Analytics — Increasing Early-Stage Project Success in a Competitive Renewable Energy M&A Landscape · Enerdatics — From Pipeline Buying to Milestone-Controlled Acquisitions