Green capacity investment with declining cost due to technological innovations under subsidy withdrawal risk

In recent years, driven by technological innovations, the investment costs of renewable energy projects are continuously decreasing. Subsidies initially implemented to stimulate investment tend to be withdrawn gradually. This study analyzes the impact of the lump-sum investment subsidy with withdrawal risk on investment and social welfare in a dynamic framework with uncertain demand and technological innovations. Assuming that the arrivals of technological innovations follow a Poisson process and each innovation reduces investment cost by a fixed factor, We find that increasing the subsidy size or withdrawal risk accelerates investment while reduces capacity. An opposite effect is found when the arrival rate of technological innovations is increased or cost reduction factor is decreased. When the withdrawal risk is significantly low or nonexist, a larger arrival rate of technological innovations or smaller cost reduction factor increases the optimal subsidy level required to maximize welfare. When aiming to achieve a capacity target lower than the optimal capacity level without a subsidy, the lower the target setting, the higher the required optimal subsidy level, which is more significant for a higher arrival rate or a lower cost reduction factor.