Cost-Based Price Floors, Soft Budgets and Capacity Adjustment in China’s Solar Photovoltaic Industry

Persistent overcapacity in photovoltaic (PV) manufacturing raises a question for the economic sustainability of renewable energy supply chains: does protecting producers’ margins help or hinder capacity adjustment? We evaluate cost-based price floors with an agent-based model of China’s PV module industry that features adaptive pricing, market-share-driven investment, credit guarantees and local government rescues. The model is driven by observed polysilicon prices and reproduces eight of ten moments from public company data within a pre-registered tolerance, although it captures only part of the 2024 price decline. Policy effects are paired comparisons across 200 random seeds. A floor at each firm’s own average total cost lowers utilisation by 5.8 percentage points and welfare by 1.1% over ten years and, in the main specification, slows exit even under hard budgets; its welfare loss grows when products are more substitutable and turns into a gain only when demand is much less price-sensitive, R&D responds strongly to profits or share pressure is very high. An industry-reference floor stabilises prices but cuts capacity exit by 75%; its 1.8% welfare gain falls to 0.5% when surviving firms are not valued as additional variety. An admission standard for new capacity raises utilisation and, while demand plateaus, welfare. Protecting margins is a poor substitute for policies that change the returns to expansion.