<p>China is undergoing a significant transformation in its economic structure and energy system. Recent advancements in distributed energy technologies and the digitalization of the energy sector present new opportunities for expanding distributed energy. However, fossil fuel consumption remains substantially higher than that of renewable energy sources. This study examines the long-term and causal effects of financial development, CO2 emissions, economic growth, exports, and urbanization on energy diversification in China from 1995 to 2022. Employing econometric methods such as the Bounds test of co-integration, the autoregressive distributed lag (ARDL) model, wavelet coherence analysis, and gradual shift causality tests, the study finds that financial development and urbanization positively impact energy diversification, indicating that improvements in these areas can enhance diversification. Conversely, CO2 emissions, exports, and economic growth negatively affect energy diversification, underscoring the challenges of achieving a balanced energy mix. Wavelet coherence analysis backs up these results by showing that the relationships between energy diversification and the factors that explain it change over time. Causality tests reveal bidirectional relationships between energy diversification and both financial development and CO2 emissions. Despite progress, the study concludes that to achieve a carbon-free society, it is necessary to emphasize the need to advance renewable energy sources and reduce fossil fuel dependency to enhance energy security.</p>