Realignment of German heat transition – risk and opportunity for district heating?

The key issues paper presented on 24 February 2026 by the CDU/CSU and SPD coalition does not only outline amendments to the German Building Energy Act (Gebäudeenergiegesetz, GEG) but also contains significant reform initiatives for the district heating sector. The aim is to accelerate expansion of climate-friendly heating networks, establish transparent and fair pricing structures for customers and tenants, and strengthen planning and investment certainty for district heating suppliers.

Accordingly, amendments are announced concerning the general terms and conditions governing marketing of district heating (AVBFernwärmeV), the tenancy law provisions regarding heat supply, including the German Heat Supply Ordinance (WärmeLV).

However, key questions will remain unanswered until the legislative draft—announced for Easter—is published. In particular, the paper does not clarify whether the requirements concerning the energy generation mix set out in the German Heat Planning Act (Wärmeplanungsgesetz, WPG), adopted by the former “traffic light” coalition, will remain in force.

Financing expansion of heating networks and heat transition

A key focus of the government’s proposal is the continued promotion of the climate-friendly expansion and modernisation of heating networks. The “Federal Funding for Efficient Heating Networks” (Bundesförderung für effiziente Wärmenetze, BEW) is to be expanded and integrated into a new act governing heating supply in order to support both construction and decarbonisation of local and district heating networks and to ease pressure on consumer prices.

Currently, funding is provided under a directive issued by the Federal Ministry for Economic Affairs in 2022. Its objective is to facilitate transformation of existing networks so that they can increasingly be supplied with renewable energy or unavoidable waste heat.

Under the current scheme, transformation plans and feasibility studies are subsidised with up to 50% of eligible costs, capped at €2 million per application. Investment and operating costs, as well as selected individual measures (such as solar thermal systems, heat storage facilities or biomass boilers), may receive subsidies of up to 40% of investment costs, capped at €100 million per application. The funding programme is open to both private and municipal entities.

In principle, the government also intends to establish a framework that allows costs related to investments in the decarbonisation of generation assets and heating network infrastructure to be passed on in an appropriate manner.  The objective is to enable long-term refinancing through district heating prices while ensuring affordability for consumers. How this balance will ultimately be achieved remains to be seen.

Reform of section 3 AVBFernwärmeV

According to section 3 AVBFernwärmeV, district heating customers currently have the right to reduce their contractually agreed heat capacity by up to 50% once per year, with four weeks’ prior notice to the end of a month, without having to provide any justification. Only reductions beyond this threshold require a longer notice period and proof that renewable energy will be used as a replacement source of heat supply.

From the perspective of suppliers, this rule creates significant planning uncertainty, as long-term heat demand cannot be reliably secured. The key issues paper therefore proposes a reform of this unconditional adjustment right, in line with the demands of industry associations. So far, however, the reform framework merely sets out the objective of balancing planning certainty for suppliers with the possibility for customers to adjust their heat capacity to realistic consumption levels. The precise legal design of these rules therefore remains unclear as of now.

Changes to German heat supply regulation

The government also intends to introduce “moderate” amendments to the tenancy law provisions on heat supply contained in section 556c of the German Civil Code (BGB) and the WärmeLV. Under the current legal framework, landlords may only fully pass on the costs of converting a building’s heating system if the new system does not result in higher expenses for tenants compared with the previous system during the first year. In other words, any change to the heating system must initially be cost-neutral.

In practice, this requirement has often hindered the switch to district heating, as such measures typically involve upfront costs that cannot be fully offset by lower fuel expenses in the first year. The government therefore proposes allowing short-term cost increases for tenants following such conversions.

Uncertainty regarding energy mix for district heating

Whether the reform will contribute to decarbonisation also depends on the extent to which the heat used in district heating is generated from renewable sources. The key issues paper does not provide detailed guidance on this issue.

Under the current legal framework, sections 29 and 30 WPG set minimum requirements for the use of renewable energy and unavoidable waste heat in district heating networks. For existing networks, the minimum share must reach 30% by 2030 and 80% by 2040. For newly constructed heating networks, a 65% share of renewable energy and waste heat has been mandatory since 2025. It remains unclear whether these requirements will remain unchanged in the course of the planned legislative revision.

Municipal heat planning

The government plans to simplify the procedures for municipalities regarding their heat planning obligations under the WPG. For municipalities with fewer than 15,000 inhabitants, the administrative burden is to be reduced through a significantly streamlined planning process, in which participation and information procedures can be centrally coordinated. For larger municipalities, the government intends to abolish the requirement to submit energy consumption and chimney-sweep data for single-family homes.

Strengthening price supervision

The key issues paper also proposes strengthening price supervision in the district heating sector, a topic that has long been debated by industry stakeholders. At present, there is no central regulatory authority overseeing the sector. Instead, potential competition law violations are addressed by the state-level cartel authorities responsible for the regions in which the respective district heating networks operate. Unlike the gas and electricity sectors, there is no regulatory oversight of network access charges, which play a crucial role in energy price formation. Since network operator and energy supplier are often part of the same entity in the district heating sector, consumer protection groups have identified a particular risk of abuse – a concern the government now intends to address.

Conclusion and Outlook

The planned legislative revision generally strengthens the framework for investments in district heating by providing greater planning certainty for district heating companies. Since both the AVBFernwärmeV and the tenancy law provisions also apply to contracting models and neighbourhood energy solutions with dedicated generation facilities, the implementation of the key issues paper could create new investment incentives for both equity and debt investors.

At the same time, the government intends to abolish the rule currently set out in section 71(1) and (8) GEG, which would have prohibited the installation of new gas heating systems from 2028 onwards. As a result, there is a risk that many landlords may not switch to climate-friendly technologies as widely anticipated by the industry. Whether district heating will achieve the projected growth therefore remains uncertain.

Ultimately, the final legislative proposal will need to strike a careful balance between climate protection, investment certainty, and tenant protection. If district heating is to make the expected contribution to decarbonising the building sector, the continued requirement to use climate-friendly energy sources for district heating generation is essential.

We would like to thank Moritz Bückle for his valuable support in preparing this article.