Abstract This article captures the effects of energy price fluctuations on the demand and supply of energy. By focusing on the industries that depend on energy inputs, we are able to apply these effects and analyze the Chinese energy industry. Four main sets of results are presented. First, rising energy prices reduce output and social welfare. Second, the energy industry in China has a vertical market structure, which acts as an amplifier of energy price fluctuations that increase with market power of energy firms. Third, environmental objectives can be achieved through energy price regulation, thereby weakening the market power of energy firms. Interestingly, the formula of price regulation needed to achieve the environmental objectives is given. Finally, entry-level regulation can reduce emissions. In summary, this article supports the concept of energy industry regulation by decision-makers.