Researchers at the Macau University of Science and Technology in China have investigated the so-called spillover effects between the upstream, midstream and downstream segments in the Chinese photovoltaic supply chain and have found that polysilicon and module manufacturing are the main sources of spillover risk transmission.
“Both polysilicon and finished solar modules occupy crucial positions within the supply chain,” the research's lead author, Tao Shen, told pv magazine. “However, from the perspective of fundamental industry structure, polysilicon, as a core upstream raw material, exerts a broad influence on downstream segments through its supply and price fluctuations. It is thus generally regarded as more strategic and foundational. Accordingly, polysilicon is commonly considered somewhat more critical to the entire value chain than finished modules.”
By definition, spillover effects refer to the transmission of shocks from one market or segment to others, resulting in a cascading reaction. “Overcapacity is a typical source of such shocks, propagating risks downstream and across the entire industry through channels such as prices, profits, and inventories,” She went on to say. “However, not all spillover effects originate from overcapacity; any factor that disrupts local equilibrium—such as policy shifts, technological changes, or international market dynamics—can serve as an important driver of spillover effects.”
The scientists used two time-frequency models known as TVP-VAR-DY and TVP-VAR-BK to understand micro-dynamic spillover effects in China's PV industry in an effort to find stabilization solutions. Time-frequency analysis investigates a signal's behavior in both the time and frequency domains simultaneously. It was used, in particular, to assess the size and direction of risk spillover effects at a specific time point, which reportedly helps determine their periodicity and optimal time delay, offering a time window for risk warning.
The analysis showed that the Chinese solar industry suffers from “pronounced” short-term risk spillover effects, with policy “shocks” and price fluctuations taking the lion's share in creating such effects. Furthermore, the academics found that spillover effects usually develop based on an ‘’upstream-driven, downstream-responsive’’ contagion pattern.
They also investigated three different hedging strategies that manufacturers can implement to reduce risks: the Minimum Variance Portfolio (MVP), which is aimed at achieving the lowest possible level of risk for a given asset; the Minimum Net Pairwise Spillover Portfolio (MCoP1), which takes into account risk contagion and achieves a achieves the highest Sharpe ratio; and the Minimum Spillover Portfolio (MCoP2), which consider the influence of third-party variables.
“Investment strategies based on spillover effects — such as the Minimum Spillover Portfolio (MCoP2) — consistently outperform the traditional Minimum Variance Portfolio (MVP) in terms of risk–return efficiency,” they further explained. “Additionally, bilateral hedging strategies demonstrate notable advantages in reducing portfolio volatility and controlling costs, underscoring their practical relevance as effective risk management instruments within the photovoltaic industry chain.”
“To control spillover effects without distorting market competition, firms can implement hedging strategies that directly address the nature of these effects,” said Shen. “For example, companies may use financial instruments such as futures contracts or long-term supply agreements, as well as pursue vertical integration across the supply chain, to distribute and hedge risks among different segments. Such measures help mitigate the impact of price or capacity fluctuations in any single segment, thereby reducing chain-reaction disruptions while preserving the dynamism and fairness of market mechanisms.”
The research work was introduced in the paper “Interstage market spillovers of the photovoltaic industry chain in China,” published in scientific reports.
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