Green energy subsidy structure design under the impact of conventional energy price uncertainty

•Supply-side and demand-side subsidies played different roles in the incentive mechanism.•Two-sided subsidy is more efficient for the government as conventional energy price uncertainty increases.•The government should focus more on the demand side when setting a more ambitious goal. In the practice of green energy promotion, consumers opt for cheaper but dirtier conventional substitutes, the green supplier faces heavy investment and demand uncertainty will be reluctant to provide until the majority of consumers choose green energy. Then, the government needs to design a subsidy structure that targets both sides of demand and supply to promote green energy. This paper presents a game-theoretic model to investigate the design of two-sided (supply and demand) green subsidies for the government with a target adoption level under the impact of uncertain demand caused by the volatility of conventional energy price. We quantified the optimal reaction of the green supplier modeled as a price-setting newsvendor and provide an optimal solution for government subsidies. We found that a supply subsidy incentivizes production by reducing the effective price and increasing the service level, whereas a demand subsidy only decreases the effective price. When we studied two special cases (uniform and triangular), we found that a supplier subsidy does not affect by uncertainty and decreases with the target level. We applied our model to design a shore power subsidy structure and found that a shipping company (demand) subsidy plays a more important role at low levels of fuel price uncertainty, whereas a port (supply) subsidy becomes more important at high levels of uncertainty. The port subsidy is an effective risk-sharing tool for the government when compared with the two-sided context and subsidizes only the shipping company.