Time is of the essence if Germany hopes to meet its ambitious net-zero emissions target by 2045. To achieve this goal, the country will have to rapidly transform how it heats its buildings while ridding itself of Russian gas. Alongside increasing the renovation rate of buildings and rolling out clean district heating, heat pumps are one of the key technologies that can phase out fossil fuels and bring renewable heat to German buildings.

The situation has become even more urgent following Russia’s invasion of Ukraine and the ongoing fossil gas crisis. About two-thirds of German gas imports came from Russia in 2020 and the building sector is the country’s largest consumer of gas for heating. In the five years leading to 2020, gas boilers made up more than half of the market for space heating, while oil boilers made up another 12%. Heat pumps came in at only 16%.

Germany will need to install around 6 million heat pumps by 2030 to be on track for the 2045 target. That translates to a massive increase in annual heat pump uptake — from 154,000 installations in 2021 to 500,000 yearly by 2023. Up until now, most of these units have been installed in new buildings. The existing building stock will need to bear most of the load and, crucially, low-income households must receive enough support to make the transformation equitable as well.

The challenge is enormous. Despite generous subsidies during the past few years to encourage the replacement of fossil fuel boilers with heat pumps, the market has been stubborn. The year 2021 saw more than 920,000 heating appliances installed in Germany – 700,000 were still oil and gas boilers.

Germany has discovered first-hand that generous subsidies from the country’s federal subsidy program (previously the Market Incentive Program and now the Federal Support Program for Efficient Buildings) are not enough to spur a rapid heat transition in buildings. Recently, Agora Energiewende and RAP released new analysis prepared by the Öko-Institut and Fraunhofer ISE that looks at how to trigger this market transformation.

Germany’s 65% rule: Russian gas out, heat pumps in

To achieve its net-zero target and reduce gas consumption, Germany needs to end fossil fuel boiler installations as soon as possible. Financial incentives for clean alternatives did not trigger the necessary market shifts in the past. Regardless of much higher gas prices, subsidies are unlikely to be enough for the required transition. This is in part because German households pay more than six-times higher taxes and levies per kilowatt-hour of electricity than for fossil gas.

What else can be done? The federal government’s answer was announced in March 2022. Starting in January 2024, all new heating systems will need to run on 65% renewables. This political agreement should apply to heating system installations in new buildings as well as replacements in existing ones.

The 65% threshold must be implemented via laws, but the agreed wording leaves the door open to hybrid heat pumps where, typically, a heat pump is combined with a fossil boiler. That would be the bare minimum — standalone oil or gas boilers are de facto ruled out and even solar thermal systems combined with gas boilers would not meet the 65% baseline.

Hybrid heat pumps are cost-advantageous only in the rarest cases. According to the new analysis, standalone heat pumps hold the economic upper hand until the outside temperature falls to -7°C, at which point it is cheaper to heat with a gas boiler. For comparison, from 1991-2020, January temperatures in Germany averaged 1.7°C.

The plan is ambitious, but Germany is in good company. This policy attention towards heating systems is consistent with efforts at the EU-level, such as the Fit for 55 package, REPowerEU plan and Ecodesign performance standard regulation, and in various Member States, several of which have announced bans for new oil and gas boilers with diverse years of implementation.

Key actions for a swift transformation

Transforming a heating market based on 700,000 fossil fuel heating systems to a market predominately centered around heat pumps in only 18 months is a daunting task. Once implemented, the ‘65% rule’ will become the regulatory instrument that draws the borders of the field on which the game will take place. And in January 2024, it will blow the whistle to kick it off. Before that happens, a massive and swift industrial transformation will be required that sweeps along all members of the supply chain, from manufacturers to installers to households. Targeted support for low-income households will be crucial so they are not disadvantaged.

The total cost of owning a heat pump could slow down their future uptake or significantly increase the cost burden on homeowners. Without considering existing subsidies, the upfront cost of a first time, fossil-fuel-to-heat-pump switch in Germany is still around two- to three-times higher than a gas boiler replacement, though much of this is associated with radiator and pipe upgrades. Upfront costs, however, have risen significantly due to a shortage of skilled craftspeople. Installers say they can reduce costs by shortening the installation time from three to two days, while manufacturers have a 40% cost reduction potential in view based on new production methods as well as economies of scale.

To help reduce operating costs, the government has shifted its famous renewable energy surcharge away from electricity bills onto general taxation. On top of that, it is gradually phasing in a carbon price on heating fuels that should reduce this imbalance in the coming years. The new analysis recommends lowering the electricity price for heat pumps by exempting them from certain levies, reducing the VAT to the EU-minimum, and enabling the use of heat pump tariffs that maximize the contribution of heat pump flexibility to meeting power system needs.

To achieve the Germany’s ambitious net-zero target and provide transparent and predictable market conditions, the whistle is in the hand of the government. Kicking off the heat pump transition in a transparent, equitable and suitably ambitious manner means tabling a draft law to implement the 65% rule as soon as possible.

Read the analysis here (in German).