So, I've figured out a solution thanks to a friend's tip. In our case, the Mac was incorrectly reporting the amount of free disk space it had, god knows why. The solution is: Use Terminal to generate a HUGE file that takes up most of the available space on your Mac (I stopped when there was only 10GB left); there's a handy script posted on StackOverflow here. You might want to customize it. Delete that file from terminal using rm /tmp/empty_file.bin. Retry installing the iOS 17.0 image.

Having the same issue today, never encountered this before. It's blocking me from running testing my app at a crucial crunch time of a 10-month long project. Just deleted dozens more GB of data off my root HD, trying again. Ridiculously, Xcode has decided to delete the downloaded iOS 17.0 image that took 2 hours, and is starting again from scratch. What a thoughtfully designed piece of software.