No proposed legislation dominated public debate in Germany in 2023 quite as much as the so-called Heating Act. The reasons: an imperfect implementation proposal by the federal government regarding a goal set by the coalition met with a public that was unprepared and overwhelmed. After a long political struggle, the coalition partners reached a viable agreement, which the Bundestag passed in September. Nevertheless, not everything is rosy. There is still an urgent need for action and corrections to ensure that more renewable energy is used in more energy-efficient buildings nationwide.

Why a Heating Act?

During the current legislative term, the federal government aims to usher in a new era in building heating. The coalition made this clear when it presented its coalition agreement in November 2021. The coalition agreement states that, starting in 2025, every newly installed heating system must be powered by at least 65 percent renewable energy. In light of Russia’s attack on Ukraine, the coalition partners have moved this target up by an entire year.

In principle, the agreement is sound. It aligns with the recommendation of the BDI study “Climate Pathways 2.0,” which states that, whenever possible, as much renewable energy as possible should be used whenever a heating system is replaced in order to achieve the 2030 climate protection target.

However, the draft bill, which sparked the debate at the beginning of the year, urgently needed corrections on a number of points. The bill was a draft and therefore not yet set in stone. The ensuing debate, however, was unstoppable. The public was completely unprepared.

What were the flaws?

The BDI very quickly identified the areas in the draft bill that needed correction: The implementation options were essentially limited to two approaches—connection to a district heating network or the installation of a heat pump. Furthermore, the draft bill focused solely on heating system retrofits; it lacked a holistic view of the building as a whole. What was also missing was a supporting subsidy program to help homeowners purchase renewable energy heating systems. Last but not least, the lead time until the law takes effect in early January 2024 would be very short.

Lack of Technology Neutrality

Technology neutrality in building heating—consistently aligned with the 2045 climate protection target—is essential for achieving climate protection goals. Buildings and structural conditions vary greatly across the country, and the possibilities and limitations for energy-efficient retrofits are equally diverse. While heat pumps and district heating networks are the most important levers for decarbonizing buildings, they cannot be readily implemented everywhere and immediately. Therefore—especially for existing buildings—it is fundamentally important to allow building owners to choose which heating system or technology they wish to use to meet the 65 percent renewable energy requirement.

Too Narrow a Focus

For the heating transition to succeed, more than just the heating system must be retrofitted: The entire building must be energy-optimized and prepared for the extensive use of renewable energy. There are many millions of existing buildings that have not yet been retrofitted and have high energy consumption levels; in these buildings, heating systems with a high share of renewable energy can only be operated in an energy- and cost-efficient manner after an energy retrofit—which involves upgrading the building envelope and optimizing operations. Renewable energy and energy efficiency must go hand in hand.

Financial Burden of Implementation

For the heating transition to succeed, policymakers must win over citizens to the cause and enable them to implement the required measures. Converting a single- or two-family home to a climate-friendly heating system is expected to cost a significant five-figure sum. Added to this are the costs of improving the building’s energy efficiency. The costs for a comprehensive renovation of a single- or two-family home thus range into the high five-figure, if not six-figure, range. Far more building owners than just those with limited capital and low incomes will struggle to shoulder these investments. Accordingly, an attractive and as targeted as possible grant program is needed.

Too Short a Lead Time

For the project to be implemented smoothly, sufficient lead time is required before the requirement takes effect, as well as a high level of maturity in the corresponding heating system planning.

All stakeholders—consumers, manufacturers, tradespeople, and planners—need sufficient preparation time, coupled with legal certainty, to adapt to the new requirements. A ramp-up of production capacity and employment in industry and the trades is essential and takes time. Against this backdrop, the January 1, 2024, deadline was unfeasible.

What does the agreement look like?

The agreement reached by the coalition partners shortly before the start of the summer recess largely addresses these concerns:

• Building owners will have a significantly wider range of options to meet the 65 percent renewable energy requirement. Crucially, hybrid heating systems—such as those combining a heat pump with a gas heater—are now also considered a valid option for compliance. They offer a solution for the many millions of buildings that still need to undergo energy-efficiency retrofits in the coming years before a renewable energy heating system can take over building and hot-water heating year-round.
• The 65-percent renewable energy requirement will initially apply only to new construction within new development areas. Existing buildings, on the other hand, will not be required to meet the 65-percent renewable energy requirement when replacing their heating systems until a municipal heating plan is in place. Since these heating plans must be in place by 2026 or 2028, depending on the size of the municipality, building owners have two to four additional years to plan for compliance with the 65 percent renewable energy requirement.
• A subsidy program is in place that allows owners to receive funding for heating system replacements even when they are merely complying with a legal requirement. Until now, it was not possible to claim a subsidy for complying with legal requirements. In addition to the basic subsidy, the law also provides for a so-called “sprinter bonus” for rapid compliance with the requirement, as well as an income bonus for low-income households. The reintroduction of loan programs has also been announced—both for heating system replacements and for energy efficiency measures, such as building insulation.

In doing so, the coalition has addressed key points of criticism raised by the BDI. In September, the Bundestag passed the coalition’s heavily revised draft bill; the law will take effect in early January 2024. Nevertheless, there is an urgent need for action and corrective measures.

Public Awareness and Communication

Linking the law to municipal heating planning is fundamentally the right approach. However, this must not be perceived by citizens as a call to wait and see. Quite the opposite is true: property owners must prepare their buildings to accommodate more renewable energy. The energy consumption of buildings must be significantly reduced so that renewable energy can be used efficiently in buildings. The BDI study “Climate Pathways 2.0” shows that the energy consumption of buildings should be cut in half on average.

This calls for public education on the part of the federal government. It must use the efficiency campaign, which has been running for over a year, to educate citizens and promote greater energy efficiency in buildings.

Expand the Funding Framework

The funding framework rightly provides special incentives for citizens who already meet the 65-percent renewable energy requirement when replacing their heating systems and are thus contributing to climate protection. However, the eligible investment costs are being reduced by 50 percent. This makes the purchase of a heat pump, for example, less attractive than before. Recommended complementary measures, such as the installation of radiant heating systems, will not be implemented because the costs exceed the subsidy framework.

The current framework for eligible investment costs for heating system replacements must be maintained so that building owners can purchase heating systems based on renewable energy and, at the same time, implement measures for the efficient operation of those systems. In addition, the “Sprinter Bonus” should apply not only to heating system replacements but also to energy-efficiency measures for the building envelope.

Regaining Trust

It is equally important that the federal government now take steps to regain the trust of citizens that was lost last year. A key element of this is ensuring that the already increased renovation subsidies are fully funded through the end of the legislative term. The funding freezes that have occurred in the recent past are still very much on the minds of many building owners eager to renovate and are remembered with distaste. This calls for a political commitment from the federal government that this will not happen again.