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

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