In Summary
Germany’s path to net-zero runs through its homes and buildings. The building sector, responsible for 21% of the country’s emissions, is lagging behind other sectors in decarbonization. By 2025, emissions from buildings are projected to exceed the net-zero path by nearly 40%. Without faster progress, the country’s broader climate goals are at risk.
Heating is at the heart of the problem – and the solution. Switching from fossil-fuel-based systems to low-carbon alternatives, particularly heat pumps, is essential. Heat pumps are efficient, increasingly cost-competitive and can provide both heating and cooling in a single system. They are expected to meet over 60% of Germany’s residential heating demand by 2045, making them central to the country’s net-zero ambitions. Yet adoption has slowed sharply. In 2024, heat pump sales in Germany fell by nearly half, with high electricity prices adding to other headwinds such as significant upfront investment, continued policy uncertainty and wider economic struggles for households.
While generous subsidies are available in Germany – covering 30-70% of the cost – they are not well targeted. As support is tied to investment size, the current system tends to favor higher-income households and inflate installation prices. Even after subsidies, out-of-pocket costs often exceed EUR9,000–12,000, placing heat pumps beyond reach for many, with every third German household boasting a net wealth below EUR10,000. Even though lower operating costs favor heat pumps over fossil boilers, recouping the high cost differential can take more than seven years.
Reforms are needed to enhance both affordability and fairness to accelerate adoption. In this context, the upcoming “Gebäudemodernisierungsgesetz,” expected at the end of January, should incorporate measures such as flat-rate subsidies, income-based support and access to low-cost financing to reduce upfront costs and make heat pumps accessible for lower-income households. In parallel, policymakers should clearly communicate the long-term cost risks of remaining on fossil heating systems, including rising gas network charges, so households can make informed investment decisions. Addressing labor shortages in installation, streamlining regulations and restoring policy credibility will also be critical.
The long-term success of the building sector transition and heat-pump adoption hinges on closing the price gap between clean and fossil heating. This means phasing out more than EUR40bn in direct and indirect fossil-fuel subsidies, strengthening carbon pricing and accelerating the decarbonization of the power sector. Getting heating right is not only central to Germany’s climate goals, but also critical to making the energy transition both achievable and equitable.