Germany's heat pump potential requires policy reforms

Germany faces challenges in decarbonizing its building sector, which contributes 21% of the country's emissions. A new report by Allianz Trade, "The heat is on: Unlocking Germany’s heat-pump potential," indicates that emissions from buildings are projected to exceed the net-zero pathway by nearly 40% in 2025 without faster progress.

The transition to low-carbon heating systems, particularly heat pumps, is crucial for Germany's climate ambitions. Heat pumps are expected to meet over 60% of the residential heating demand by 2045. However, adoption has sharply slowed, with heat pump sales falling by nearly half in 2024. Factors cited include high electricity prices, policy uncertainty, and broader economic struggles for households.

While Germany offers subsidies covering 30-70% of costs, the current system is criticized for favoring higher-income households by tying support to investment size, potentially inflating installation prices. Out-of-pocket costs can exceed EUR9,000–12,000 even after subsidies, making them inaccessible for many, despite lower long-term operating costs compared to fossil fuel boilers.

Allianz Trade recommends reforms to improve affordability and fairness, such as flat-rate subsidies, income-based support, and access to low-cost financing. The report also stresses the need for clear communication about the long-term cost risks of remaining on fossil heating systems, addressing labor shortages, streamlining regulations, and restoring policy credibility.

Ultimately, closing the price gap between clean and fossil heating is key. This involves phasing out over EUR40 billion in fossil fuel subsidies, strengthening carbon pricing, and accelerating the decarbonization of power generation. Successfully addressing heating is vital for achieving Germany's climate goals and ensuring an equitable energy transition.