Unlocking Germany’s Heat Transition

Executive Summary

Germany’s heat transition is stalling in buildings. Emissions fall too slowly, households face steep and uneven costs, and fiscal room is tight. The current building efficiency subsidies are not attractive for households over-burdened by the energy transition while over-supporting already cost-effective measures.  

A net-burden guarantee can unlock progress. The proposed “renovation cost cap” (Sanierungskostendeckel) caps each beneficiary’s net heating and renovation costs so that, after measures are implemented, annual costs are no higher than before. The cap is calculated via a transparent, standardised benchmark of historical vs projected operating costs and actual investment outlays. Support is only paid where a net burden arises.  

The status quo is poorly targeted and leaves finance gaps. Today’s subsidy scheme largely subsidises projects that would be economic anyway, misses hard-hit households even with income bonuses, and does not solve upfront-financing constraints — especially for asset-poor homeowners. Additionally, behavioural barriers suppress take-up across incomes.  

Design choices keep incentives aligned and admin light. Cost coverage could be set around 70% on average (with an income-differentiated scheme of up to 100%), time-limited or declining over the financing horizon, and optionally paid partly up-front to act as equity. Eligibility should align with municipal heat plans and basic efficiency standards. The approach minimises windfalls because grants track net burdens, not gross capex.  

Fiscal costs are manageable and comparable to existing scheme – while better targeted. Indicative modelling shows mid-term federal outlays of around €7.3 bn per year, rising towards €17.7 bn as cohorts roll in; costs then stabilise as new entrants replace expiring support. High legacy commitments remain a constraint, but the new structure improves distribution and effectiveness.  

Credit guarantees are the missing piece. Public credit backstops for a narrowly defined, socio-economically targeted group can address bankability without inflating subsidies — drawing on precedents in SME lending and structured to curb adverse incentives.