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

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

Antal sider17
StatusUdgivet - 2023

Bibliografisk note

Funding Information:
T.K.Boomsma acknowledges support from the project AHEAD, Analyses of Hourly Electricity Demand , funded by Energiteknologisk Udviklings- og Demonstrationsprogram (EUDP) under the Danish Energy Agency.

Funding Information:
The work of Ekholm has been carried out with funding from the Academy of Finland (decision numbers 311010 and 341311 ).

Publisher Copyright:
© 2023

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