Analysis of Policy Risks in the Cost Pass-Through Mechanism for City Gas Companies

Based on the latest information retrieved, this report systematically analyzes the policy risks arising from the imperfect cost pass-through mechanism of city gas companies.

refers to the institutional arrangement in the natural gas industry chain where upstream procurement costs can be effectively transmitted to downstream terminal sales prices. The upstream and downstream price linkage mechanism launched by the National Development and Reform Commission (NDRC) in 2023 has initially addressed the loss issue of “wholesale-retail price inversion” for city gas enterprises[1][2]. However, this mechanism still faces multiple policy risks and structural obstacles in actual implementation.

Most regions have set an upper limit for single increases in residential natural gas prices (e.g., 0.3-0.5 CNY per cubic meter). While this policy is designed to ensure people’s affordability, it also constitutes a major obstacle to cost pass-through[1][2].

• Risk Manifestation
  : If international natural gas prices rise sharply again in the future, city gas enterprises will face the risk of being unable to fully pass on costs
• Policy Impact
  : The issue of “last-mile” bottlenecks in the cost pass-through mechanism remains prominent[1]

• Regional Difference Risk
  : Provinces and cities vary in the implementation intensity and detailed rules of the linkage mechanism, resulting in different policy environments for city gas enterprises in different regions
• Time Lag Risk
  : Price adjustments usually involve a time lag, making it difficult to reflect upstream cost changes in real time

Various unreasonable markups may exist in provincial pipeline networks and gas distribution links, which affect the transmission efficiency of market price signals[1][2].

• People’s Livelihood Guarantee Pressure
  : Adjustments to residential natural gas prices need to comprehensively consider social affordability, and policy formulation tends to restrict price increases
• Policy Balancing Dilemma
  : How to strike a balance between ensuring people’s livelihood and maintaining reasonable profits for city gas enterprises is a long-standing policy challenge

Under the “Dual Carbon” goals, the “transition bridge” role of natural gas lacks a clear national-level positioning, leading to uncertainty in its development path[1][2].

• Growth in gas sales volume still needs attention even as gross margins recover[3]
• It has strong pro-cyclical characteristics, and performance is significantly affected by natural gas price fluctuations

• Traditional city gas enterprises face the challenge of compressed growth space[1]
• There is a need to transform into integrated energy service providers and deploy new businesses such as distributed photovoltaics, energy storage, and hydrogen energy

• Mechanism reforms such as large users seeking direct supply bring long-term risks[1]
• Need to respond to the trend of electrification replacing natural gas in areas such as residential cooking

• Closely monitor the implementation rules of the price linkage mechanism in various regions
• Optimize procurement strategies to hedge against price fluctuation risks
• Strengthen cost control and improve operational efficiency

• Promote the coordinated development of natural gas and renewable energy[1]
• Strive to play a peak-shaving role in the new power system
• Explore integrated “Natural Gas +” solutions

For investors, the main risks faced by city gas companies include[3]:

1. Risk of reforms falling short of expectations
2. Risk of high volatility in natural gas prices
3. Risk of domestic cost pass-through mechanism implementation falling short of expectations
4. Profit squeeze caused by insufficient upstream cost pass-through

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[1] Sinopec News Network - “Natural Gas Will Realize a Systemic Leap to Become a ‘Basic Pillar Energy’” (January 14, 2026)
https://www.cup.edu.cn/news/jj/c10016462bd34fca8e9c608b29a274a7.htm

[2] Sinopec News Network - “Natural Gas Will Realize a Systemic Leap to Become a ‘Basic Pillar Energy’”
http://www.sinopecnews.com.cn/xnews/content/2026-01/14/content_7140391.html

[3] GF Securities - “2026 Investment Strategy for the Utilities Industry”
https://m.hibor.com.cn/wap_detail.aspx?id=65bcd8a52715dbbb4b8fc327f053c5ba

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: The core policy risks arising from the imperfect cost pass-through mechanism for city gas companies are the cost pass-through barriers caused by factors such as restricted adjustment ranges for residential natural gas prices, markups in the gas distribution link, and uneven policy implementation. These risks will be particularly prominent during periods of international natural gas price fluctuations, exerting sustained pressure on the profitability of city gas enterprises. It is recommended that investors prioritize high-quality city gas enterprises with well-implemented cost pass-through mechanisms and diversified business layouts when selecting investment targets.