What You Need To Know About China’s New Energy Law

On January 1^st, 2025, China implemented for the first time a comprehensive national energy law. China’s energy law represents a massive drive to overhaul China’s macroeconomic orientation and regiment a previously free-flowing ad-hoc energy market. Using the law’s many stipulations, China endeavors to increase domestic consumption of goods previously exported, decrease the importance of lower-tech and low-value-added exports, prioritize high-tech exports, incentivize energy innovation, and push investments into new locales. This law is a consummate, albeit underappreciated, piece of modern Chinese economic policy.

The law will be as transformational for foreign investors as it is for Chinese consumers. For decades, China went without an overarching energy law, delegating decision-making power on prices and energy rationing during times of scarcity to local actors. A dizzying array of pricing authorities, state-owned enterprises, utility operators, party committees, and bureaucratic offices held sway. With only loose guidelines from China’s National Development Reform Commission, informal arrangements extremely contingent upon local conditions prevailed. Enterprises, even foreign-owned ones in China’s vaunted Special Economic Zones like Shanghai or Shenzhen, often paid varying electricity rates from counterparts across the street.

This law has the potential to rationalize China’s energy market and end the prevailing Gordian Knot of market irregularities, enabling holistic economic development and decisive climate action. It could also stymie the local initiative and bargaining that made such a massive economy operating under severe structural constraints functional. Regardless of the outcome, investors must prepare by learning what the law aims to achieve and what opportunities will arise as a result.

Don’t Expect Immediate Changes To China’s Energy Portfolio Or A Boost In Renewables After China’s Energy Law

China is an energy-scarce country that imports huge quantities of hydrocarbons to satiate ever-climbing energy demands while maintaining an addiction to domestically mined coal. This has pushed China to adopt political priorities Americans would recognize from the 1990s and early 2000s, including an increasing involvement in Middle Eastern politics by brokering Saudi-Iranian normalization and a thirst for Saudi oil. China is now the largest purchaser of Saudi crude, while American demand falls.

Despite increasing energy imports and foreign energy entanglements, China remains confident that its energy imports and carbon emissions will peak by 2030 before declining. This overarching plan dates to 2016’s 13^th Five-Year Plan and isn’t a new projection. The new energy law doesn’t alter the timetable; instead, it provides the plan with more support for realization and redoubles efforts in the face of shortfalls.

China’s energy initiatives are to be realized through massive investments in nuclear power, hydropower, – including the world’s largest hydropower project in Tibet – and infrastructure modernization. China’s addiction to coal remains largely unaddressed. Residential heating difficulties stemming from dependence on coal forced China to backtrack on gasification efforts except in some particularly polluted urban locales.

While renewables such as wind and solar energy are important, they only generate a fraction of China’s electricity usage. China does not anticipate increasing renewables’ share of domestic electricity production. Wind and solar energy production, alongside related industries such as electric vehicles, have far more utility in exports to the global south to help China overcome the middle-income trap. Don’t expect China’s focus on energy-related exports or obsession with remediating international energy dependency to translate into immediate profits or changes in energy sourcing.

China’s Energy Law Creates Inland Opportunities And Peril

China’s coast and SEZs like Shenzhen and Shanghai consume most investor attention and serve as the primary destinations for foreign investment. This is only the latest manifestation of a long historical trend that China has long grappled with: the dynamic of a rich eastern coast and an impoverished western interior. For investors willing to move into China’s inland, where government incentives and support abound stemming from China’s new energy law, there are new potentially lucrative markets.

Energy-intensive enterprises, especially advanced manufacturing, around the upper reaches of the Yellow River, the Hexi Corridor, Yellow River meander, northern Hebei, Songliao, and the lower reaches of the Yellow River especially have opportunities to grow rapidly. These opportunities are not spurred on merely by government incentives: populous, logistically integrated regions with underserved markets very close to raw material inputs are a recipe for success. Unfortunately, these opportunities come at the expense of readily accessible global consumers, meaning companies must weigh the political risk of total integration into the Chinese market and their ability to engage with Chinese officials systematically.

There is another third rail in this equation: Xinjiang. Xinjiang, long the center of allegations of genocide and forced labor and the cause of numerous sanctions, is also a new inland energy hub under China’s new energy law. While it is theoretically possible for companies to never engage with this hub, its inclusion into the same legal category and the high degree of China’s internal integration generates risk for investors.

China’s Energy Law Will Increase, But Stabilize, Prices

Investors capitalizing on China’s export-driven development have long boosted profit margins through artificially low energy rates. Chinese SEZs could always purchase cheap energy from the interior and make these available for exporting firms at public expense. Many government initiatives designed exclusively for local Chinese firms were, in practice, circumvented by having a Chinese partner and a wink from local authorities. If China’s energy law is even remotely successful, the era of cheap energy on China’s coast is over.

This will undoubtedly have a chilling effect on an economy already grappling with deflation by throttling inputs in the one area of the economy in China where price rises aren’t universally desired. Nevertheless, higher but more stable prices without the market-distorting effects of unsystematic subsidization are a net gain for China and foreign investors alike.

For firms reliant on cheap Chinese labor exporting to the global market, this means significant economic difficulties. Energy prices will go up unless China’s economic stimulus fails and its deflationary spiral accelerates. Investors shouldn’t expect the local support or bailouts of the past since these difficulties are not unanticipated and remain part of China’s broader economic plan to dampen certain exports and encourage growth elsewhere. Firms that produce or are willing to reorient towards the local market will find more success.

China’s energy law represents a brave new world for energy markets, foreign investors, China watchers, and international geoeconomics. The result is uncertain – comprehensively regulating the energy activities of 1/6^th of humanity is a gargantuan undertaking with no promise of success. China’s energy law is sure to introduce change, but nobody can say what the end will be. What can be said is following this energy law closely provides an excellent opportunity for savvy investors and geopolitical forecasters alike.