China’s Energy Dilemma: Emissions Climb Amidst Record Renewable Build-Out and Hormuz Crisis
Investors keen on the global energy landscape are closely scrutinizing China’s latest emissions data, which reveals a 2% year-on-year increase in carbon dioxide output for the first quarter of 2026. This surprising climb occurred despite the nation installing a record volume of new wind and solar power generation capacity. The core issue driving this trend appears to be a significant amount of “wasted” or curtailed renewable energy, forcing China’s electricity system to lean more heavily on coal and gas than in the same period last year.
While the ongoing crisis in the Strait of Hormuz has intensified China’s focus on energy security, accelerating ambitions in clean energy and electrification, the existing electricity grid infrastructure and operational frameworks are struggling to keep pace. Despite the recent emissions growth, the country’s CO2 levels from fossil fuels and industrial activity still remain below their peak recorded in early 2024, offering a glimmer of hope amidst the current challenges.
Key indicators from the first three months of 2026 paint a complex picture for energy investors. Wind power capacity expanded by an impressive 23% year-on-year, while solar capacity surged by 33%. However, this growth was severely undermined by a sharp increase in the unutilized output from both wind and solar installations, as the grid proved unable to accommodate the influx. This curtailment directly led to a 4% year-on-year rise in power sector emissions. Without this rise in unaccommodated renewable energy, power sector CO2 would have remained flat. Emissions in other economic sectors saw a more modest 1% increase.
The primary culprit behind this “wasted” renewable generation isn’t a lack of transmission infrastructure, but rather the rigid operational management of existing coal-fired power plants and the overall power grids. This inflexibility creates a bottleneck, preventing the efficient integration of variable renewable sources.
The Strait of Hormuz crisis, and the subsequent surge in oil and gas prices, began influencing China’s energy system adjustments in the first quarter of 2026. This trend intensified through April and May, marked by significant reductions in oil imports and output from oil-based chemical production. The share of gas in electricity generation also saw a notable decline. Ironically, the inability to fully harness new wind and solar power plants left China more exposed to the impacts of the Strait of Hormuz blockade, increasing its reliance on other, often imported, fossil fuels. This vulnerability could worsen if a forecast “super El Niño” event later this year limits crucial hydropower output, while global fossil fuel supplies remain tight. Nonetheless, a silver lining exists: the Hormuz crisis could paradoxically steer China towards a lower CO2 emissions trajectory than previously anticipated, provided key policies outlined in its 15th five-year plan are fully implemented.
Emissions Plateau Holds Despite Q1 Rise
Recent analysis indicated China’s CO2 emissions from fossil fuels and industry had maintained a “flat or falling” trend for nearly two years. The latest data, however, highlights a 2% year-on-year increase for Q1 2026. Despite this uptick, emissions levels remain comfortably below the March 2024 peak, suggesting that the broader plateau trend persists for now. While previous quarters showed emissions reductions across most sectors, with the exception of the coal-based chemicals industry, the latest period witnessed more widespread increases, with the power sector emerging as the dominant driver of emissions growth.
Aggregate emissions from other economic segments remained relatively stable, presenting a mixed bag of increases and ongoing declines. The coal consumption within the chemical industry continued its robust expansion, growing by 20%, a trend that showed no noticeable deviation following the Strait of Hormuz closure and the subsequent oil price surge. This contradicts some market speculation that the crisis would trigger a marked acceleration in China’s coal-chemicals output.
The apparent consumption of oil products initially rebounded in January and February, largely fueled by transportation demand, but registered a slight decline in March as global oil prices escalated. This shift was also partially influenced by the timing of the Chinese New Year. Emissions originating from the cement and steel industries continued their downward trajectory, a direct consequence of an 11% contraction in real estate investment during Q1 2026, following a 17% reduction in 2025. This downturn translated into a 7% drop in cement production and a 5% decrease in crude steel output, impacting demand for these carbon-intensive sectors.
The Challenge of ‘Wasted’ Wind and Solar Power
After a decline in 2025, power generation from coal and gas saw a 4% increase in the first quarter of this year. This occurred despite an overall power demand growth of 5.2% and a 9% rise in hydropower generation. Given these conditions, the record growth in solar and wind power capacity throughout 2025 should theoretically have absorbed the increased demand and significantly reduced the need for fossil-fuel-based generation. The trend became even more pronounced in March, when power demand grew by a modest 3.5%, hydropower output climbed 9%, yet fossil-power generation still increased by 4.2%.
The underlying reason for this counterintuitive rise in fossil-power generation lies in a sharp decline in the electricity output per unit of installed capacity for both solar and wind power, commonly known as the “capacity factor.” Had these capacity factors remained stable, the substantial increase in solar and wind capacity was projected to deliver an additional 160 terawatt-hours (TWh) of clean power during Q1, compared to the previous year. Factoring in nuclear and hydro, this would total 170 TWh, comfortably exceeding the 120 TWh increase in power demand. However, the actual surge in clean power generation amounted to only 60 TWh, with wind power showing almost no growth.
Specifically, while wind power capacity expanded by 23% year-on-year (an increase of 120 gigawatts) from Q1 2025 to Q1 2026, its average capacity factor plummeted from 27% to 22%, an 18% reduction. This dramatic drop meant wind power generation grew by a mere 1% year-on-year. Similarly, solar capacity grew by a robust 33%, but its average capacity factor fell by 11%, resulting in only an 18% increase in solar power generation.
While annual variations in capacity factors due to weather are normal, especially for solar and wind, this year’s decline represents an extension of a longer-term trend. The average capacity factors for solar and wind have fallen by 19% and 10% respectively between 2022 and 2025. Approximately one-quarter of this three-year decline in capacity factors is attributed to increased reported curtailment, which signifies electricity effectively “wasted” because the power network cannot accommodate it. Furthermore, the remaining drop in capacity factors cannot be fully explained by changes in weather conditions, as national average wind and solar conditions actually improved from 2022 to 2025.
In the first quarter of 2026, weather conditions accounted for roughly half of the decline in wind capacity factor and a quarter of the solar capacity factor drop. This strongly implies that the remainder is due to intensified curtailment resulting from inadequate grid management and integration. A clear indicator of escalating curtailment is observed in January-February, where despite better wind and solar conditions than the previous year, capacity factors still fell. The significant discrepancy between expected and actual capacity factors, even beyond reported curtailment and weather, suggests that a substantial amount of curtailment goes unrecorded, either by statistical definition or reporting gaps. Market participants have consistently noted that actual curtailment levels far exceed official statistics, which typically only account for “system reasons” and exclude lost generation tied to market trading, grid-connection conditions, and other “special” causes.
Overall, wind and solar could have delivered an additional 170 TWh of electricity in Q1 2026 if the rate of curtailment had not increased in prior years. This figure alone surpasses France’s total power generation over the same period. The most pronounced reductions in capacity factors, when accounting for weather variations, were observed in Inner Mongolia, Xinjiang, and Liaoning. These northern provinces face particular challenges during the heating season due to the inflexible operation of plants that simultaneously provide heat and power.
Fundamentally, inflexible grid management stands as the primary cause of curtailment. Implementing flexible operations for coal and gas-fired power plants could substantially boost the grid’s capacity to integrate solar and wind power. However, current practices largely involve medium- and long-term contracts for coal-fired generation, stipulating fixed electricity amounts at fixed prices. This structure offers no incentive for output adjustments to create space for variable renewables. Similarly, inter-provincial electricity trading is predominantly based on annual contracts, hindering the real-time transmission of variable solar and wind output across jurisdictions.
These systemic issues demonstrably impact renewable curtailment rates. Power-system modeling for 2023, for example, indicated that flexible power-grid operation would have virtually eliminated the need for curtailment. The government has acknowledged solar and wind curtailment as a central obstacle in its energy transition. Recent policy directives call for enhanced inter-province trading and improved flexibility of coal-power plants as crucial solutions, implicitly recognizing these as key areas for reform. While significant increases in storage capacity, including pumped hydro and batteries, should theoretically improve grid integration, a lack of incentives for storage operators limits the system’s ability to capitalize on this technology. The government has recognized this deficiency, advocating for electricity pricing mechanisms that enable energy storage to “participate fairly.”
Meanwhile, China’s new renewable-pricing rules, which shifted existing solar and wind plants to market-based electricity sales rather than direct compensation from grid operators, have not yet significantly reduced curtailment. This could be due to provinces finalizing implementation plans only in late 2025, leaving insufficient time for market participants and operators to adapt. China’s overarching goal is to establish a “new type of power system” capable of integrating massive amounts of wind and solar by 2027. In the interim, the government has also urged “reasonably pacing” utility-scale “new energy” capacity additions to align with provinces’ capabilities to enhance their grid’s “regulation capacity.”
Hormuz Crisis: Reshaping China’s Energy Sector Dynamics
China’s energy sector has demonstrably begun adjusting since March to the surge in oil and gas prices triggered by the Strait of Hormuz closure. This period has seen sharp reductions in oil imports, a decline in the share of gas in thermal power generation, and a cutback in oil-based chemical production. Overall gas consumption fell in March, even though its use in the power sector increased as the fuel mix shifted from gas to coal within the thermal power segment, ultimately boosting overall thermal generation.
Prior to the current crisis, elevated gas prices already strained household budgets. Millions of households had transitioned from coal stoves to gas-based heating over the past decade as part of air pollution efforts. However, gas-price subsidies designed to support this shift have expired in recent years, leading to rising heating costs for consumers.
China’s oil imports experienced an immediate and sharp decline following the price surge, with net imports falling further as exports were restricted. This trend persisted into May, with shipments dropping over 40% year-on-year in the first three weeks of the month. State-owned oil giant Sinopec reported a 4.8% increase in Q1 oil product sales. Apparent consumption of oil products grew by 5.5% in January-February but contracted by -0.3% in March, indicating an early impact of the price surge, though the late timing of the Chinese New Year also played a role.
The electric vehicle (EV) sector continues its robust growth, capturing 53% of vehicle sales in April, up from 47% a year prior. Demand for EV charging surged over 50% year-on-year in March. The prevalence of plug-in hybrid vehicles on the roads enables drivers to rapidly switch from petrol to electric power when economic incentives favor it. Furthermore, EVs, which constitute only 15% of all registered cars, accounted for 24% of highway trips during the May 1 holiday, underscoring their higher utilization rates and greater impact on oil displacement than their fleet share suggests.
Crude oil processing volumes fell by 2% in March and 6% in April, reversing growth seen in January-February. Plastics output growth moderated in March before turning into a decline in April. The rise in oil prices has boosted the profitability of the highly carbon-intensive coal-to-chemicals industry. While some speculated that the industry would aggressively increase output in response to the Hormuz crisis to reduce oil reliance, it was already operating at high capacity utilization, averaging 87% in H1 2025, leaving little short-term headroom for substantial output increases. Coal use in the chemical industry did show a rapidly rising trend, increasing 19% in January-February and 22% in March, but critically, it did not exhibit a “step change” after the crisis began.
The global fossil-fuel crisis is also influencing China’s clean-energy sector through international demand. Exports of solar products, batteries, and EVs recorded an impressive 56% growth year-on-year in Q1, reaching $55 billion. This surge was partly driven by front-loading shipments ahead of changes to tax rebates for solar and battery exports at the end of March. However, export value still grew by 38% in April, signaling strong underlying demand in the clean energy export market.
Implications of the Crisis for China’s Energy Transition
The current oil and gas crisis presents both an opportunity and a challenge for China’s energy transition, simultaneously enhancing the economics of clean energy and domestic coal. The increased cost of imported fossil fuels dramatically improves the financial viability of electrification, clean energy production, and indigenous coal extraction. Crucially, the Strait of Hormuz closure and the ensuing global fossil-fuel market volatility resonate deeply with Chinese policymakers’ long-held concerns about over-reliance on seaborne fossil fuel imports. This is poised to significantly reinforce the nation’s focus on energy security.
The previous fossil-fuel crisis in 2021-2022 spurred a wave of new coal-power plants, coal mines, and coal-to-chemicals facilities in China. This time, however, any expansion in coal mining is likely to be more contained, constrained by the government’s “anti-involution” drive aimed at curbing harmful price competition, as well as China’s overarching climate goals. Domestic coal production actually declined in the first four months of the year, despite rising oil, gas, and coal prices. Furthermore, increasing coal prices will reduce the profitability of coal-fired power generation, at least in the short to medium term. The perceived necessity for additional new coal-power projects is also mitigated by the fact that after record additions in 2025, 206 GW of coal-fired capacity remained under construction in January, a legacy of extensive permitting over the preceding five years. The energy regulator has recently urged provinces to “strictly limit” the addition of new coal-power plants and other “regulating” power capacity in regions with sufficient firm capacity. Moreover, the limited role of gas in China’s overall energy system means there is little scope for significant coal-for-gas substitution.
The coal-to-chemicals industry stands as an exception, potentially receiving a further boost as it can substitute oil and gas, albeit at the cost of very high carbon emissions. However, the economic incentive might be less pronounced than it appears at first glance. While crude oil prices for summer delivery surged by over $40 per barrel since the start of the year, 2030 prices, a more relevant benchmark for long-term investments in new plants that take years to build, are only up by $5. Any expansion in coal-to-chemicals will also face limitations from China’s new carbon emissions control system, specifically the requirement for local governments to offset emissions from new industrial projects by decommissioning existing capacity, assuming these controls are effectively enforced.
Significantly, since the last fossil-fuel crisis, China’s concept of energy security has broadened to encompass clean energy and electrification, moving beyond a sole focus on coal and traditional fossil fuels. This evolving perspective is clearly reflected in how state media has covered energy security in the wake of the Middle East geopolitical tensions. As such, the oil and gas crunch is likely to accelerate the electrification of transportation and buildings. It also strengthens the case for “green fuels,” such as green hydrogen and its synthetic derivatives, which are a major priority in China’s new five-year plan. Solar and wind power also become more attractive, both economically and politically, as a direct result of the crisis. While their upside might be partially constrained by a prevailing narrative that their growth has outpaced grid management capabilities, rather than institutional limitations, they will undoubtedly benefit from fossil fuels becoming more expensive and volatile.
Nonetheless, curtailment has emerged as a pivotal issue impacting the pace of China’s energy transition. It not only diminishes the immediate benefits of clean energy but also erodes investor confidence in further clean capacity investments by increasing risks and reducing returns. The positive flipside of the current rise in curtailment is the immense potential for substantial increases in clean energy supply once the installed wind, solar, and energy storage capacity can be fully utilized. As noted, a key government priority for the coming years is to construct a “new type of power system” capable of seamlessly integrating vast amounts of variable renewable capacity. The ultimate balance between whether this crisis primarily benefits coal or clean energy will hinge on the effective implementation of key climate and energy provisions within the 15th five-year plan. If power-system reforms that support solar, wind, and storage are executed, concurrently with robust carbon-emission controls limiting coal-to-chemicals expansion, China is poised to follow a lower CO2 emissions trajectory than initially projected before the crisis.
Data and Methodology
The insights presented in this analysis draw upon comprehensive data from official sources, including the National Bureau of Statistics of China, the National Energy Administration of China, the China Electricity Council, and China Customs. Supplementary industry data was sourced from WIND Information, and specific oil consumption data from Sinopec, China’s largest oil refiner. Electricity generation figures for wind, solar, and thermal power (broken down by fuel) were derived by multiplying monthly power generating capacity by monthly utilization rates, using China Electricity Council data via the Wind Financial Terminal. Total thermal power, hydropower, and nuclear power generation figures were directly obtained from National Bureau of Statistics monthly releases. Biomass generation, for which monthly utilization data was unavailable, was estimated using an annual average of 52% from 2023. Power-sector coal consumption was estimated based on coal power generation and the average heat rate of coal-fired power plants each month, circumventing issues with official coal consumption statistics.
CO2 emissions estimates leverage National Bureau of Statistics default calorific values for fuels and emissions factors from China’s latest national greenhouse gas emissions inventory (2021). The CO2 emissions factor for cement relies on annual estimates up to 2024. For oil, apparent consumption of transport fuels – diesel, petrol, and jet fuel – is taken from Sinopec’s quarterly results, with monthly disaggregation based on production minus net exports. These three fuels predominantly serve the transportation sector. Apparent consumption of other oil products is calculated from refinery throughput, subtracting the production of transport fuels and net exports of other oil products. Non-energy fossil fuel use is subtracted from total chemical industry fossil fuel consumption, and process emissions are calculated based on fossil fuel consumption less carbon retained in products. Emissions from plastics incineration are based on a peer-reviewed 2022 estimate combined with growth rates in overall waste-to-energy generation. Metals industry process emissions are calculated using industrial output data and IPCC default emission factors.
Reported curtailment and capacity utilization in its absence are derived from the “offtake rates” (利用率) reported monthly by province for solar and wind by the National New Energy Consumption Monitoring and Early Warning Center. Total curtailment is estimated by comparing predicted solar and wind capacity utilization (based on weather conditions and assuming no curtailment) with reported utilization. Prediction models are fitted using historical monthly utilization data and weather data from NASA Power and CFSv2 for power plant locations, as identified by Global Energy Monitor data. Weather variables used include hourly wind speed, temperature, solar irradiation, and humidity at power plant sites in each province from 2020-2023.