Renewable energy investment under subsidy withdrawal risk and mean-reverting electricity price

Subsidy policies initially introduced to stimulate renewable energy investments tend to be withdrawn after some time. This paper examines how subsidy withdrawal risk influences the firm's optimal investment timing and capacity in a dynamic framework with a mean-reverting electricity price. We find that when the risk is low, an increase in the probability of withdrawal accelerates investment but reduces capacity, whereas the opposite holds under high risk. Mean reversion in price further modulates such effect by shaping both the option value of investment and the expected net present value. Higher volatility and slower reversion speed increase the option value, thereby mitigating the acceleration effect of withdrawal risk on investment. In contrast, a higher long-term mean raises the expected net present value, which strengthens the positive effect on investment while alleviating its negative impact on capacity. These findings imply that policymakers should manage the subsidy withdrawal risk and fully account for the mean-reverting nature of electricity price for effectively promotion of renewable energy investment.