Q&A – Germany agrees phaseout of fossil fuel heating systems

***This factsheet is part of our new dossier Boiler room revolution: Europe kickstarts shift to climate-friendly heating***

Why does Germany require a new “building energy law”?

Emissions from Germany’s building sector have stayed level despite efforts to decarbonise other sectors in recent years. Fossil fuel-powered heating systems are still the norm in the country’s homes, with over 80 percent of Germany’s heating demand being supplied by fossil fuel energy. Energy-efficient retrofit rates remain low, meaning the sector is off target in the country’s drive to reach climate neutrality by 2045. The target requires the vast majority of Germany’s 40 million homes to switch to climate-neutral heating, such as heat pumps, within 20 years. Given that boilers are typically in operation for 20 years or more, new systems installed today would need to be ready for a climate-neutral future. Yet last year, two thirds of all new heating systems sold in the country still ran on gas or oil.

How did the government reach a decision?

Germany’s three-way government coalition composed of Social Democrats (SPD), Green Party, and pro-business Free Democrats (FDP) reached a hard-fought compromise on how to manage this transition in early June this year, by effectively postponing earlier plans for a universal ban on the installation of new fossil fuel heating systems from as early as 2024, and finalising details on subsidies. The parliament, where the coalition has a comfortable majority, agreed to the law in early September, after a lawmaker's injunction had stalled parliamentary adoption before summer.

The government agreement followed months of divisive conflict between the parties about the original law proposal by Green economy and climate minister Robert Habeck. The draft was met with fierce resistance from opposition parties, the right-wing media, and from the FDP within the increasingly strained government coalition. Critics were up in arms over the plans, because they will force many homeowners into high investment costs at some point.

What exactly does the heating law say?

The key provision of the proposed law is a shift towards heating systems that use more than 65 percent of renewable energy. This would amount to a de-facto ban on the installation of new gas or oil heating systems, which cannot meet this quota. However, the law stipulates that this rule will only apply to new buildings in areas of new residential developments from January 2024.

In existing buildings and new buildings outside of new development areas, new oil and gas heating systems can continue to be installed until the respective municipality has presented a plan for the transition to climate-neutral heating in its jurisdiction, which can include an expansion of district heating, for example (the coalition agreed on a separate law for municipal heat planning in August). Large cities have until 2026 to provide these plans, while small towns have a later deadline of 2028. Thus, the compromise grants homes that are not covered by a municipal heating plan an extension of 4 years to shift to climate friendly heating, compared to earlier agreements.

The government plans to provide financial support to households making the necessary investments, with the level of subsidy provided on the basis of income and timing. All homeowners who install climate-friendly heating systems will get reimbursed for 30 percent of the investment costs. If the taxable household income is below 40,000 euros, which applies to 45 percent of homeowners, another 30 percent subsidy will be added. There is an additional 20 percent if the replacement takes place before 2028, but total subsidies are capped at 70 percent.

The use of fossil fuel-run heating systems will be banned entirely from 2045, the year in which Germany aims to have made its economy entirely climate neutral.

What impacts will the law have on the development of alternative heating technologies?

In theory, a whole range of heating systems qualify for the 65 percent renewable energy rule, for example heat pumps, solar thermal, and hybrid systems combining a fossil fuel system with a heat pump. Installation of “hydrogen-ready” gas boilers also remains possible, but they must run on an increasing share of biogas if hydrogen is not available, making them more expensive. Biomass and biomethane systems can also be used, but only in existing buildings.

Despite the range of technological options and numerous exemptions, the law is set to initiate a broad shift towards heat pumps. Modelling by think tanks for the government show that heat pumps will make up more than 80 percent of new installations by 2030, with district heating covering most of the rest.

Will the law ensure that Germany reaches its climate targets for the building sector?

Environmentalists and many experts argue that the law is still insufficient to reach the country’s climate targets in the building sector. The law has been “watered down, takes effect far too late, and is unclear on many points," according to Friends of the Earth Germany. Economist Veronika Grimm, who advises the government as a member of the German Council of Economic Experts, said earlier proposals had been “substantially weakened without any measures being taken to ensure that climate protection targets are met.” Nils Thamling, heating expert at think tank Prognos, also said reaching 2030 climate targets has become “highly unlikely.” NGO Germanwatch said the law will finally end years of standstill in cleaning up the building sector, but will not be enough to achieve Germany's climate targets. It added that the new exceptions for hydrogen and "green" gases are set to become very expensive for users. Environmental NGO Nabu heavily criticised that the law also allows the use of wood for heating, which it described a "grave mistake." The economy ministry (BMWK) has estimated that by 2030, the law will only achieve around three quarters of the emission reductions envisaged by the its original proposal.

The municipal utility association VKU however welcomed the principle that municipalities must present a "heating plan" before homeowners are forced to make a switch. This would at least give citizens planning security as to whether connection to a district heating network is possible or foreseeable, as "in this way, they can avoid bad investments."

Why was the law so controversial?

The controversy mainly centred around the higher cost of climate-friendly boilers. Installing heat pumps is usually at least twice as expensive as conventional heating systems, often costing more than 20,000 euros. However, proponents argue that heat pumps’ operating costs are much lower than conventional systems’ because of their much higher efficiency and Germany’s rising CO2 price for heating fuels like oil and gas.

There are not only concerns about high costs for homeowners, but also for tenants as Germany has one of Europe’s highest share of renters. The law says that landlords are allowed to add ten per cent of the costs of a new heating system to the rent. In addition, the rent may not increase by more than 50 cents per square metre. Original plans for an exemption for homeowners older than 80 years were dropped.

Another point of controversy was the inclusion of “hydrogen-ready” heating systems, which was added at the insistence of the pro-business FDP in the name of “technology freedom.” Most experts say “hydrogen-ready” boilers don’t make sense, because they are highly inefficient when compared to heat pumps, and therefore could result in higher costs for those who install them. Dozens of independent studies have concluded that hydrogen will not play a significant role in heating, given that it will require five to six times more renewable energy than heat pumps – and that the scarce fuel is going to be needed in industrial sectors. This is why a broad coalition of environmentalists, trade unions, consumer groups and professional associations have called them a “sham” solution that delays effective climate action. The FDP’s arguments in the heating debate mirrored the party's insistence on allowing the use of synthetic fuels in combustion engines for decarbonising transport, which are also considered unrealistic by most experts.