Q&A: How the Merz government aims to resolve Germany’s heating energy row

The Building Modernisation Act (BMA) replaces the previous Building Energy Act (BEA), which was designed to chart a path towards climate-neutral heating and passed in 2023 amid massive controversies that were described as “one of the greatest political dramas in recent German history.” Advocates of a rapid transition towards clean technologies such as heat pumps argued the law was key to meeting climate targets and pointed to the technology’s low long-term running costs, while critics argued that investment costs would overburden homeowners and tenants.

A key provision of the BEA, which was overseen by then-Green Party economy minister Robert Habeck, was that new heating systems – starting with new buildings in new developments – needed to run on at least 65 percent renewable energy, resulting in a de facto gradual ban of oil and gas boilers, with some exceptions.

Even though the government at the time under SPD chancellor Olaf Scholz softened the most controversial requirements in reaction to opposition and media attacks, the “heating law” remained a key point of contention in the 2025 election, with the conservative CDU/CSU alliance of newly elected chancellor Friedrich Merz promising to “abolish” the contentious provision of the BEA, a pledge that was adopted in the coalition treaty with junior partner SPD. 

In late 2025, Merz’s coalition relabelled the BEA as the Building Modernisation Act (BMA) and said it would deliver its highly anticipated reform proposal early in the following year. 

The parliamentary group leaders of Merz’s conservative alliance and the SPD presented the proposed law reform in February, with a 5-page draft on key points of the BMA. After reaching a consensus on how to partly protect tenants from cost rises if landlords opt for new gas or oil boilers, the government cabinet in May agreed a final draft. 

A wide range of experts have heavily criticised the draft law at a parliamentary hearing in June. Representatives from the heating industry, tenant and homeowner associations, local utilities and other stakeholders said the new new rules are too bureaucratic, carry substantial risks for consumers, and might undermine constitutionally protected climate targets. However, Germany's parliament passed the reform in July. The new rules will: 

• Eliminate the mandatory quota of 65 percent renewable energy sources in newly installed heating systems
• Allow the continued installation of new gas and oil heating systems
• Drop the ban on fossil fuel heating from 2045
• Oblige suppliers to gradually increase the share of “green gas” or “green oil” in their networks to bring down fossil fuel use; consumers must opt for contracts with a green gas share as well, starting with 10 percent in 2029 (15% from 2030, 30% from 2035, 60% from 2040)
• Continue to support purchases of new climate-friendly heating systems such as heat pumps until at least 2029
• Protect tenants from “excessive running costs through the installation of uneconomical heating systems” (If landlords decide to install a new fossil fuel boiler in an existing residential building, they must then bear half of the grid fees, the CO₂ price and the costs of green fuels)
• Review emissions reduction progress in the buildings sector and “correct the course” where necessary by 2030  

The point at which the previous BEA’s quota of 65 percent renewable energy applied differed depending on location. New housing estates needed to comply with it from 2024, but existing buildings had no restrictions until their local government presented their mandatory plans to decarbonise heating in their jurisdictions. These so-called municipal heating plans say where district heating would be available and when, thus informing households about which options will be available in the future. With the 65-percent requirement gone, homeowners no longer have to expect that their local municipal heating plan could directly impact the technology they are currently using.  

The parties said homeowners would be allowed to decide for themselves what kind of heating system they want to invest in, adding that most would already opt for heat pumps or district heating when changing their systems. “We strengthen their freedom of choice and individual responsibility, since homeowners know best what kind of heating systems works best in their home.” 

The parties said they would present a “technology-open catalogue” of admissible heating system options that includes heat pumps, district heating, hybrid systems, bioenergy heating as well as fossil-powered boilers under the condition that they start using a gradually increasing share of greenhouse gas-neutral fuels. Admissible additives would include hydrogen produced with renewable energy sources, fossil power plants equipped with carbon capture and storage (CCS), or the energy from waste incineration.  

Households

The government parties said the reform would restore freedom of choice to homeowners, who themselves can decide what the best investment is in their individual case. However, many of the factors determining a heating system's future costs are still unknown, with many indicators clearly point at much higher prices for fossil-based solutions. 

These include a significant increase in gas grid fees, as the spread of heat pumps and other technologies reduces the number of users, raising running costs for remaining users. The government is currently legislating a path for utilities to be able to shut down gas networks where they see no future for them. This would enable them to deny connection requests and disconnect users from the grid without their consent, following long notification periods.

A further uncertainty is the future level of carbon pricing, which will be expanded to the heating sector under the updated European Emissions Trading System ETS2. Additionally, it remains unclear how much the required green additives will cost which are meant to be gradually added to fossil heating gas, nor where the required quantities should come from. According to price comparison website Verivox, gas supply contracts that already use the 10-percent share envisaged for 2029 are on average 25 percent more expensive than fossil gas contracts. 

If gas-fired heating systems continue to run, this could become costly, especially for tenants, as they have no influence on the technology used but would have to shoulder continuously increasing costs. NGO Environmental Action Germany (DUH) said the agreement would risk tying tenants to an “expensive and disappearing gas infrastructure” without having any say. 

Advocacy group and price comparison service co2online said that the costs of heating with fossil fuel-based systems over their lifetime would be significantly higher than for alternatives like heat pumps. For an average single-family home over the coming twenty years, heating costs for oil and gas heaters could be up to around 40,000 euros higher than for heat pumps. 

Researchers at environmental think tank Öko-Institut, in a report commissioned by Greenpeace, said that the average costs of heating a household with gas could go from 11 cents per kilowatt-hour (ct/kWh) in 2026 to 26 ct/kWh by 2040 due to increases in grid fees, biomethane procurement, the CO2 price, and value-added tax (VAT).

An agreement to split the additional costs for the use of new fossil heating systems in half between landlords and tenants is of key importance. 

Property owner lobby group Haus & Grund and fossil fuel industry association En2X had called for adopting the quota to allow homeowners to continue operating oil and gas boilers, and to postpone investments in climate neutral technologies. 

“A reliable CO2 price path in European emissions trading, attractive tax write-offs and stable, socially balanced subsidies are prerequisites for triggering investment and avoiding fossil fuel lock-ins,” recommended think tank EPICO in a report analysing regulatory alternatives.

Industry

While the agreement continues to support the purchase of clean technologies such as heat pumps, it gives fossil boilers a new chance to remain in the market, which creates new insecurities over which technologies will be used where and for how long. 

Allowing the installation of fossil boilers would make the expansion and acceptance of alternative solutions more difficult to achieve, said energy industry group BDEW. Lock-in effects could “cement the use of gas and oil heating systems” also in cases in which heat pumps or district heating should be used, said BDEW head Kerstin Andreae. 

Sustainable industry group BNW said the 65-percent rule had already become a linchpin for industrial value chains and remained a prerequisite for meeting climate neutrality targets in the buildings sector. It said that easing emissions requirements would not be in line with general climate policy unless there are “convincing scientific or legal reasons” for doing so, which would not be the case for the proposed reform steps. 

Germany’s parliament also adopted changes to the support scheme for heating modernisation. By more strictly tying support to income levels, the government aims to save more than two billion euros by 2030. The economy ministry said that the reformed rules would help low-income households to change their heating systems, adding that it expects installation costs for heat pumps to fall as a result of the new support regime. 

The industry lobby group German Heat Pump Association (BWP) warned that the changes could push many homeowners to opt for cheaper fossil heating systems, rather than heat pumps. The gradual reduction in modernisation support would “bring the heat pump market to its limits,” said BWP managing director Martin Sabel. He said the changes mean that policies to lower prices for electricity and increase carbon prices would be needed to ensure that emissions-free heating remains the most attractive option. 

The German Gas and Hydrogen Industry association said the new rules would give people “freedom of choice instead of prescriptions.” The lobby group argued that half of Germany's households use gas for heating, which would now become gradually cleaner. 

Environmental organisation Greenpeace said the proposed reform amounted to “a big present for the oil and gas industry” and would “bury climate action in the buildings sector.” Since the green additives that are supposed to be mixed into fossil fuels are scarce and expensive, a rise in gas grid fees is to be expected, the NGO said.

Municipalities and cities

Utility association VKU warned that the green gas quota might turn out to be a sham, lulling consumers into a false sense of security and then costing them dearly. “We do not currently see how the ramp-up of green gases, and biomethane in particular, for blending into the gas grid can be massively increased without causing further cost increases for owners and tenants.” 

The government coalition also said it wants to make municipal heating planning easier for small municipalities with fewer than 15,000 residents, as these often lack the staff and resources to comply with the standards applied to larger cities. The aim was to cut the bureaucratic effort by up to 80 percent compared to regular municipal heating planning, especially regarding public participation and information schemes, to allow the finalisation of heating plans “within just a few months.” 

Due to the much lower demand than for heating, municipal cooling plans should be limited to cities with more than 45,000 residents and become mandatory only five years after heating plans have been adopted, the parties said. 

District heating providers will become obliged to create so-called price transparency platforms that allow customers to see how prices are formed, while mechanisms for price supervision and arbitration should be strengthened. 

“The climate targets remain in place,” the parties said in the reform’s outline. Cutting greenhouse gas emissions from heating is one of the biggest hurdles on Germany’s path to climate neutrality, with the buildings sector continuously failing to meet emission reduction targets. 

While heat pumps and district heating are prevalent in new buildings, the vast majority of existing buildings still rely on fossil fuels for heating (56% of households had a gas boiler, 17% used heating oil in 2025). Without the 65 percent target, achieving national and EU targets for climate protection, renewable energies and energy efficiency, with the aim of a zero-emission building stock by 2050, would become “seriously jeopardised,” said Stefan Thomas from environmental think tank Wuppertal Institute.

According to a report by environmental think tank Öko-Institut, the new requirements “will significantly widen” the existing gap between Germany’s national climate targets and actual emissions. The weaker regulation would increase the gap between expected cumulative emissions and the binding emissions budget until 2040 by between 108 and 172 million tonnes, the report said.

“The main effect of the key points of the Building Modernisation Act is a weakening of climate protection,” the institute concluded in a following report. The reforms “shift risks into the future and onto third parties without ensuring a reliable path to achieving [climate] targets.”

Germany is increasingly at risk of failing EU-mandated climate targets under the Effort Sharing Regulation for the transport and building sectors, which could result in the need to buy emission allocations from other member states that have overachieved their targets. Öko-Institut researchers expect the purchase of additional emission rights to result in costs of over one billion euros, which would be borne by the public sector. 

“Germany cannot afford to fail to make progress in climate protection in the building sector,” said Thomas Drinkuth, head of the Transparent Building Envelope, an association representing construction industries. “Those who continue to heat with gas or oil should therefore limit their consumption as much as possible,” he added, arguing that energy efficiency renovations gained in importance as a result of the agreement.

Several observers said the law could face legal challenges also after its adoption. Thins includes a warning by CDU members in May, who raised objections to the proposed law and urged colleagues to not endorse it in its current form. A legal opinion by the German parliament's scientific expert service in June said that the law might “unduly shift emissions reduction burdens into the future.” 

The NGO Environmental Action Germany (DUH) announced it would seek legal action against the law, arguing it undermines constitutionally enshrined climate targets unless adjustments are made. DUH also said that procedures regulating the law's adoption were not followed adequately, arguing that Germany's states should have the right to veto the law. 

Several German states are dissatisfied with the plans to relax decarbonisation rules in the heating sector, as these clash with their more ambitious targets for achieving climate neutrality.

Large municipalities in the country were required present their own local heating plans by the end of June 2026 , while smaller towns have an additional two years.