Revenue and risk of variable renewable electricity investment: The cannibalization effect under high market penetration

Wind and solar power depress market prices at times when they produce the most. This has been termed ‘cannibalization effect’, its magnitude established within economic literature on current future markets. Although it a substantial impact revenue of VRE technologies, cannibalization effect is neglected in capital budgeting literature, including portfolio- real options theory. In this paper, we present an analytical framework that explicitly models correlation between production electricity price, based costs surrounding generation capacity. We derive closed-form expressions for expected short-term long-term revenue, variance timing investments. The these system characteristics illustrated with numerical examples, where find to decrease projected profit relative investment cost from 33% 13% −40%, depending assumption capacity expansion rate. Using framework, threshold increases by 67%, due inclusion cannibalization.