Preview 2026: Merz government must deliver on key energy projects as patience wears thin

When Friedrich Merz became chancellor seven months ago, he promised to chart a new course for the country’s industrial and financial policy that would place competitiveness above decarbonisation efforts. 

At the end of 2025, key tenets of his new path remain unclear. From the long overdue decision on new back-up gas plant auctions to the still blurry path to decarbonisation in the heating sector, companies and citizens alike are still waiting for answers about a clear path forward.

The conservative Christian Democrat (CDU) took over the country's leadership after the preceding coalition government collapsed amid budget woes and a flagging economy at the end of 2024. Today, the country’s economy still faces massive headwinds and public debt inflated to record levels due to the 500-billion-euro special fund for infrastructure and climate action. The government must reassure the public that taxpayers’ money is put to good use with the fund, which its own economic advisors lambasted for lacking sufficient compliance and monitoring mechanisms.

In a poll from early December, 76 percent of respondents said they disapproved of the chancellor's work – the lowest popularity rating ever reached by his predecessor Olaf Scholz. The BDI said that many business leaders in the country were “disappointed beyond measure” with the government’s performance. According to the industry lobbyist, the government “somewhat lost the thread” in recent months and failed to deliver both on deeper reforms and on symbolic gestures to signal a turnaround.

Referring to ongoing delays in legislation on gas plant support auctions, Kerstin Andreae, head of the German Federation of Energy and Water Industries (BDEW), said the industry slowly is “losing our patience” with the government.

Environmental groups, meanwhile, urged the government to rethink its ostensibly pro-industry decisions, such as endorsing an end to the EU’s 2035 deadline for new combustion engine cars or postponing an increase in the national carbon price. NGO umbrella group DNR said that following through with these plans would mean “disastrous” consequences for the country’s climate policy, and called for ambitious proposals in an upcoming climate plan. 

The government must present a Climate Action Programme detailing steps to reach its 2030 and 2040 emission reduction targets in different economic sectors by March, with transport and heating being the main laggards. Getting all ministries to agree to a joint programme will not be an easy task for environment minister Carsten Schneider. 

The coalition must also update its renewable energy support framework to bring it in line with new EU rules. The reform will also include proposals for new renewable expansion volumes – a particular focus after economy ministry suggestions they might need to slow the pace of expansion. The government is also due to present its overhaul of the existing plan for the transition to climate-friendly heating. Chancellor Merz’s conservatives heavily attacked the existing rules introduced by the previous government and pledged to abolish them. But many experts believe the country’s climate targets will only allow cosmetic changes to the Building Energy Act (GEG).

Therefore, Merz’s conservative CDU/CSU alliance and its centre-left coalition partner, the Social Democrats (SPD) – who have been unable to contain the very infighting that many voters resented in Scholz’s tripartite government – have a lot on their plate for 2026. But policymaking is growing more complex:

The country will have five state elections next year, of which two in eastern Germany in autumn hold a particular risk for elevating the far-right Alternative for Germany (AfD) to new heights. Dissent within Merz’s conservatives over how much to cooperate or cast out the AfD might emerge as a major issue in this context.

Key dates:

• State elections: The largest and also first state voting for a new government in 2026 is economic powerhouse Baden-Wurttemberg (8 March). This is followed by western state Rhineland-Palatinate on 22 March and then by eastern Saxony-Anhalt (6 September), in the capital Berlin and in northeastern Mecklenburg-Western Pomerania (both 20 September).
• Climate Action Programme: The programme, which was initially promised for the end of the year, has to be presented by March 2026. It is expected to focus on measures in the transport and buildings sector, where Germany currently lags severely behind on cutting greenhouse gas emissions.

German industry enters 2026 under mounting pressure to stay competitive while cutting emissions. Manufacturers face not only economic headwinds from increasing Chinese competition, US tariffs, geopolitical uncertainty, red tape and comparatively expensive energy, but also rising carbon costs, tighter EU rules on product and supply-chain emissions, and accelerating electrification needs.

Many energy-intensive businesses can expect some cost relief from Germany’s subsidised “industry electricity price” due to come into effect at the start of the year. But for many companies, 2026 will also be shaped by the first real test of the EU’s carbon border levy on trade flows. The Carbon Border Adjustment Mechanism (CBAM) will move into its financial phase, raising costs for carbon-intensive imports. At the same time, the volume of free allowances in the bloc’s emissions trading system (EU ETS) shrinks, increasing costs for steel, chemicals, cement and other heavy industries.

Meanwhile, the implementation of the EU’s Net-Zero Industry Act and Critical Raw Materials Act will push companies to align their supply chains with European resilience goals. For many companies, 2026 will mark the point at which climate policy shifts from planning to enforcement.

A defining challenge for 2026 will be whether Germany can secure the energy infrastructure needed for decarbonisation. Many electricity grids remain overstretched, while hydrogen and CO2-networks are slow to materialise. Following a series of setbacks for the country’s ambitious plans for using green hydrogen for industry decarbonisation, firms face continuing uncertainty over future availability.

Domestically, the federal government is due to update its Climate Action Programme, laying out concrete measures to keep Germany on track for its 2030 emissions reduction goals. Industry will be watching closely for decisions on long-term funding instruments, such as carbon contracts for difference (CCfDs), which reimburse companies for the extra costs of clean production, and for clarity on the future electricity market reform meant to stabilise power prices while supporting renewable expansion. Germany has committed to making CCfDs a central instrument of industrial decarbonisation, but their rollout is slower and more complex than originally planned. The government plans to launch the next round of these “climate contracts” in 2026, following delays caused by budget constraints and lengthy EU state-aid negotiations.

Industry is also keenly awaiting an electricity market reform that will have long-term impacts for industrial power prices, as well as the first tenders for building gas-fired power plants as a backup for renewables. The government said auctions for plants with a combined capacity of 10 gigawatts will take place next year.

Key dates:

• Early January: “Industry power price” enters into force.
• Early January: CBAM payments start.
• 20 – 24 April:Hannover industry trade fair, which also focuses on energy and environmental technologies.
• Mid-2026: Auctions for CCfDs expected to start.
• Late 2026: German government to identify the technologies needed to fulfil its ambition to build the world’s first fusion power plant in Research and Innovation Roadmap

Adding more flexibility to the way households and industry use electricity will be key to a power system that increasingly runs on renewables. Because wind and solar power are inherently intermittent, incentivising users to consume power when it is plentiful, and to reduce their demand when it is not, is important to bring costs down and make the power system more efficient.

To unlock this flexibility, Germany must expand storage options and ensure users can respond to power availability. A key step came with the obligation for electricity suppliers to offer at least one dynamic tariff from 2025, but additional incentives must follow. As Germany paves the way towards covering 80 percent of its electricity demand with renewables by 2030, measures and proposals for 2026 to unlock flexibility include:

• Battery integration: Germany’s energy industry has called for new rules granting large-scale batteries access to the grid. Pending connection applications stood at 720 gigawatts in 2025 – more than two and a half times Germany's current installed electricity generation capacity. In light of this “battery tsunami”, regulators should establish transparent connection procedures and ensure that other grid customers also have their rights respected, energy industry association BDEW said.
• Bidirectional charging: As Germany adds more electric vehicles (EVs) to its roads, it should leverage the potential of using their batteries as standalone storage devices, the renewable energy industry has said. Bidirectional charging – which could supply power back to the grid when needed, instead of just drawing it – is technically possible with many existing EV models. However, electricity taxes and grid fees mean that, so far, this makes little financial sense. EV batteries could jointly form so-called virtual power plants, adding flexible capacity to the grid. Regulatory and tax rules are due next year.
• Smart meter rollout: The coalition government pledged to accelerate the sluggish smart meter rollout, but has so far failed to deliver concrete policy proposals to achieve this. Smart meters are the prerequisite for dynamic electricity tariffs, and these in turn are key to aligning and adjusting electricity consumption to a volatile, renewable-driven supply. Germany lags far behind the European average for smart meter installations.
• System friendly transition: The government has made it its mission to reign in energy transition costs, and plans to better align renewable power expansion, as well as new batteries and hydrogen electrolysers, with the needs and constraints of the power system. Location-based funding programmes or dynamic grid fees, for example, could incentivise new flexible capacity to be added where there are grid bottlenecks. Germany has to act to reinforce its power grid to make better use of renewable energy, especially as it rejected the European transmission grid association’s recommendation to split its single power price zone.
• Battery production: 2026 could see Germany’s government establish “competence clusters” for battery materials and production, as stated in the country’s “High-Tech Agenda”. Previous efforts by Germany and Europe as a whole to rival Chinese dominance in battery production have borne little fruit.

Early 2026 will bring reforms to Germany’s so-called heating law – the legislation that stipulates the gradual phase out of oil and gas boilers – officially called Building Energy Act. Its introduction by Germany’s previous coalition government under Olaf Scholz was mired in controversy, pushing chancellor Merz’s government to pledge to “abolish” it in its coalition agreement.

After months of speculation, the coalition government agreed in mid-December to change the name of the Building Energy Act to Building Modernisation Act, and plans to make it “more technology-open, flexible and simpler”. It remains unclear whether the requirement for new heating systems to operate with at least 65 percent renewables will remain in place.

Clean heating alternatives such as heat pumps and geothermal systems could get a boost next year. The first as a result of additional legal clarity and the latter thanks to a law to accelerate geothermal projects by giving them an “overriding public interest” status, which was agreed in parliament in early December.

Germany has to lay the groundwork to transpose EU directives into national law next year. This includes the Energy Performance of Buildings Directive (EPBD), which requires the most energy-inefficient buildings to be renovated, the gradual phase out of boilers powered by fossil fuels, and for “zero-emissions” buildings in new construction from 2030. The leaders of Germany's states, however, recently tasked chancellor Merz with lobbying the European Commission for a two-year delay of the deadline to implement the law nationally.

The buildings sector has continuously failed its emission reduction targets and a large share of Germany’s homes still relies on fossil gas for heating.

Key dates:

• End of January: Economy and buildings ministries present key points on new Buildings Modernisation Act for more “flexible and simple” clean heating, cabinet “immediately” prepares draft law.
• End of February: Government adopts amendments to new Buildings Modernisation Act.
• 29 May: Deadline to transpose EPBD into national law, including requirement to develop long-term renovation strategy and introduction of life cycle assessments accounting for new building’s emissions from construction to demolition.
• 30 June: Deadline for towns and municipalities with over 100,000 inhabitants to submit their heating plans, detailing where district heating and hydrogen or biogas networks will be available. The data is supposed to provide clarity for homeowners about whether their buildings can be connected to district heating networks or if they need to install a heat pump or other systems to comply with decarbonisation plans. The current Building Energy Act stipulates that, from this date, new heating systems in locations with a plan must operate using at least 65 percent renewable energy. Smaller towns have until 30 June 2028 to present their heating plans.