TY - JOUR

T1 - Revenue and risk of variable renewable electricity investment

T2 - The cannibalization effect under high market penetration

AU - Reichenberg, L.

AU - Ekholm, T.

AU - Boomsma, T.

N1 - Publisher Copyright: © 2023

PY - 2023

Y1 - 2023

N2 - 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.

AB - 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.

KW - Cannibalization effect

KW - Investment analysis

KW - Merit order effect

KW - Real options

KW - Variable renewable energy

UR - http://www.scopus.com/inward/record.url?scp=85168001032&partnerID=8YFLogxK

U2 - 10.1016/j.energy.2023.128419

DO - 10.1016/j.energy.2023.128419

M3 - Journal article

AN - SCOPUS:85168001032

VL - 284

JO - Energy

JF - Energy

SN - 0360-5442

M1 - 128419

ER -