  The market revenue for variable renewable electricity (VRE) assets has been
under intense scrutiny during the last few years. The observation that wind and
solar power depress market prices at times when they produce the most has been
termed the 'cannibalization effect'. This can have a substantial impact on the
revenue of these technologies, the magnitude of which has already been
established within the economic literature on current and future markets. Yet,
the effect is neglected in the capital budgeting literature assessing green
investments in the electricity sector (e.g. including methods such as
portfolio- and real-options theory). In this paper, we present an analytical
framework that explicitly models the correlation between VRE production and
electricity price, as well as the impact on revenues of the surrounding
capacity mix and cost to emit CO$_2$. In particular, we derive closed-form
expressions for the short-term and long-term expected revenue, the variance of
the revenue and the timing of investments. The effect of including these system
characteristics is illustrated with numerical examples, using a wind investment
in the Polish electricity system as a test case. We find the cannibalization
effect to have major influence on the revenues, making the projected profit of
a project decrease from 33% to between 13% and -40% (i.e. a loss), depending on
the assumption for the rate of future VRE capacity expansion. Using a real
options framework, the investment threshold increases by between 13% and 67%,
due to the inclusion of cannibalization. Our results likewise indicate that
subjective beliefs and uncertainty about the future electricity capacity mix,
e.g.\ VRE capacity growth, significantly affect the assessment of the revenue
and investment timing.
