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Figure 5.15 Biomass versus oil heating in new installations in Germany, 2008-18

Heating fuel oil prices are the key parameter determining sales of biomass versus oil heating installations.

Sources: IEA (2019c), Energy Prices and Taxes First Quarter 2019; BDH (2019) Marktentwicklung Wärmeerzeuger 2008-2018 [Market Development of Heating 2008-2018].

In line with Germany’s dual strategy for decarbonisation of the heating sector, which aims to maximise energy efficiency gains while simultaneously increasing the role of renewables, policies are aligned accordingly. Energy-saving requirements for buildings are set out in the EEWärmeG, EnEG and EnEV.

Going forward, the energy conservation law for buildings will be simplified and streamlined during the current legislative term. The regulations of the EnEV, EnEG and EEWärmeG will be merged into a new Act on Energy in Buildings, thereby transposing the requirements of EU law for public non-residential buildings with effect from 1 January 2019 and for all buildings with effect from 1 January 2021. The current energy-related requirements for existing buildings and new buildings will continue to apply.

District heating

District heating accounts for only around 8% of total residential energy demand in Germany. While this is a relatively minor level compared with several other European countries, the share is increasing thanks to developments in urban areas. More than 20% of new apartments are connected to district heating. District heating is considered for its potential to integrate renewable heat and contribute to sector coupling. As shown in Figure 5.16, however, fossil fuels dominate district heat production, with renewables (essentially bioenergy and waste) representing only 14.4% in 2017, i.e. half of coal (28%). (See also Chapter 3 on energy and climate change for a more detailed discussion on district heating and co-generation.)

The funding programme Heat Networks 4.0 (Modellvorhaben Wärmenetzsysteme 4.0) was implemented on 1 July 2017, to incentivise the planning and implementation of modern, high-efficiency networks with high shares (>50%) of renewable energy and waste heat supply. The rate of funding under this scheme depends on the share of renewables and waste heat in the network (it increases for each additional percentage point in renewables share), and applies to the entire network system (including heat production, distribution and storage infrastructures).

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generation (see Chapter 7 on electricity), the potential of heat pumps to decrease buildings CO2 emissions will increase substantially over the long term.

According to European Heat Pump Association data, the number of cumulatively installed heat pumps in Germany tripled from 350 000 in 2008 to one million in 2018. This growth in installations has been supported via investment support from the MAP for building renovations, and the Energy Efficiency Incentive Program (APEE). With a 12% market share, since 2017, heat pumps have overtaken oil boilers to become the second- highest-selling heating system after gas boilers. This is also the consequence of the EEWärmeG, stipulating that construction of new buildings will be permitted only if they use renewable sources for space and water heating. Since January 2016, oil burners are no longer permitted as a means of heating in new buildings.

While these are all positive trends, they concern only a minority of buildings and installations. Taking into account the whole building stock, both sales and cumulative installations were still dominated by fossil fuels in 2018. Gas boilers accounted for more than three-quarters of total sales, while oil condensing boilers (allowed only in old buildings) represented 8% of the market (Figure 5.17). Most importantly, in cumulative terms, heat pumps still represent only 2.5% of energy consumption for heating and cooling, while fuel oil heating supplies more than 25% of the total. A major reason for this situation is the different taxation regime for different fuels for heating.

Figure 5.17 Fuel shares in sales and energy consumption for residential space heating in Germany

Source: BDH (2019) Marktentwicklung Wärmeerzeuger 2008-2018 [Heating Market Developments 2008-2018].

As of January 2019, statutory tax rates in Germany were EUR 61.35/1 000 litres (L) (~EUR 5.3/MWh) for heating oil and EUR 5.50/MWh for natural gas, compared with EUR 20.50/MWh for electricity. These levels have not significantly evolved since the last IDR. This positions Germany as the country with one of the lowest heating oil prices among all IEA countries (Figure 5.18).

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In the context of heat, it is also important to note that the APEE may lead to an unintended consequence of locking-in fossil fuel consumption for heating, as it also provides financial support to upgrades from older oil and gas boilers to newer boilers.

Prospects for renewable heat

In the draft NECP submitted to the European Commission at the end of 2018, Germany proposed a 27% target for the share of renewables in heating and cooling in 2030, with a 24-32% range for the buildings sector. However, according to the baseline scenario discussed in the NECP, renewable energy would account for only 17.3% of the heat consumption in 2030 – well below the indicative target – if current policies were to remain unchanged.

While current policies have brought progress in renewable heat, much stronger efforts are needed to achieve the necessary step change in the pace of renewable heat technology deployment to achieve Germany’s ambitious 2030 targets. This includes removing the tax advantage for fossil fuels as discussed above, and significantly increasing financial support. For comparison, the total amount of incentives in the buildings sector in 2018 was around EUR 2.5 billion per year, which is only 10% of the amount German consumers pay annually for the EEG surcharge.

Changing the existing distortions across taxation of different fuels for heating and cooling will be necessary if Germany effectively wants to implement sector coupling at scale in buildings and industry. At the same time, Germany may consider introducing a carbon tax or a carbon price, which have proven to be effective instruments in Nordic countries, for triggering a fuel shift towards low-carbon sources of energy for heating and cooling. In addition, tax breaks for building renovations have proven to be an effective and costefficient instrument to foster both energy efficiency and renewables in existing buildings in other European countries, most notably Italy.

Renewable transport

Transport accounted for 25% of TFC in Germany in 2017 and 22% of energy-related CO2 emissions. However, the sector has proven to be the most challenging to deliver GHG emissions reduction, not only in Germany. Transport has a lower share of renewable energy consumption than electricity and heat.

Biofuels account for most renewable energy in transport in Germany. However, similar to many other countries, Germany’s share of renewables in transport is relatively low at around 5% (Figure 5.22). This is because most biofuels are currently consumed through blending at low percentages (typically 10% or less by volume or energy) with fossil fuels.

In 2015, Germany switched from a 6.25% energy-based biofuels mandate to the climate protection quota (CPQ) policy. This places annual GHG emissions reduction targets on transport fuel suppliers. The CPQ was initially set to deliver a 3.5% reduction, before increasing to 4% in 2017. Biofuels, electricity and upstream efficiency savings can be used for compliance under the policy. Tax incentives for biofuels expired on 1 January 2016, leaving the CPQ as the sole means of biofuel policy support. The introduction of the CPQ provides a direct mechanism to meet the requirement of the EU Fuel Quality Directive that fuel suppliers reduce the GHG emission intensity of automotive fuels marketed in 2020 by 6% compared with 2010 levels. The CPQ has stimulated annual increases in the emissions

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Figure 5.21 GHG emissions reductions from biofuels used for CPQ compliance 2014-17, compared with gasoline and diesel

IEA 2019. All rights reserved.

The German CPQ has been effective in improving GHG emissions reductions per litre of all forms of biofuels compared with fossil transport fuels.

Notes: In 2014, a 6.25% energy-based mandate was in place; over 2015-16 the CPQ was in place with 3.5% GHG emission reduction target, increasing in 2017 to a 4% GHG emission reduction target.

Source: F.O. Licht (2018), “Germany – Biofuels' GHG savings rise to over 80%”.

Increased uptake of electric mobility is also likely to be needed if Germany’s 2030 target is to be achieved. Electricity used in road transport is eligible to be multiplied fourfold. The government targets 1 million electric vehicles (EVs) by 2020 and 6 million by 2030 (BMU, 2019). Recently, an aspirational target of 10 million EVs by 2030 was mentioned.

The increasing penetration of renewable energy in Germany’s electricity generation portfolio, reaching 36% in 2018, has supported a 17% reduction in the carbon intensity of electricity supply, from 490 tonnes of CO2 (tCO2) per MWh in 2008 to just over 400 tCO2/MWh in 2018. The continuation of this trend, alongside the higher efficiency of electric motors compared with internal combustion engines, supports the potential for EVs to contribute towards Germany’s renewable energy and emissions reduction policy commitments for 2030 and beyond (see Chapter 4 on energy efficiency).

Germany’s draft NECP acknowledges that the European Union’s minimum requirements for conventional biofuels and new renewable technologies will not be enough to meet Germany’s energy and climate goals. Germany is also at the forefront of the development of synthetic fuels produced from renewable electricity, CO2 and water via power-to-liquid processes that may offer an alternative fuel source for transportation in the long term.

Assessment

Renewables have made significant progress in Germany in recent years, driven by robust policy support underpinning a strong increase in renewable electricity. For the first time in 2017, the total installed capacity of renewables (112 GW) surpassed that of fossil fuels and nuclear combined (105 GW). The share of renewables in electricity generation increased from 25% in 2013 to nearly 38% in 2018.

At the same time, significant progress was achieved in limiting the costs of the EEG surcharge, in line with the IDR 2013 recommendation. Owing to reforms in 2014 and 2017,

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Currently the quota is 4% and will increase to 6% in 2020. Biofuels, renewable electricity and upstream emissions reductions are all eligible for reaching the quota. A holistic strategy considering EVs for urban mobility and other options such as biofuels or synthetic fuels for long-haul transportation will be needed.

In 2017, renewable electricity accounted for only 0.7% of final energy consumption in transport, but recently new momentum has emerged from the German car industry. Informal targets currently under discussion are 1 million EVs by 2022, 6 million by 2025 and 10 million by 2030. Reaching these ambitious targets will require a massive effort including in planning smart charging infrastructure and managing the possible impacts on distribution grids.

Sector coupling can, in principle, play a very important role in the energy transition. The use of renewable electricity for transport with EVs and for heating and cooling in buildings and industry – e.g. with heat pumps – can at the same time increase end-use efficiency, reduce emissions and provide additional flexibility for the power system and thereby facilitate integration of variable renewables. However, sector coupling faces formidable barriers as taxes and other levies on electricity – and therefore end prices – are much higher than for fossil fuels, in particular heating oil. Even taking into account the much higher efficiency of heat pumps, this difference in charges and pricing is a strong barrier against the deployment of this technology, which today accounts for only 2% of energy consumption for heating. The German government should consider options for removing barriers to sector coupling and creating a level playing field across sectors, otherwise sector coupling will be very difficult to materialise.

To date, not enough attention has been devoted to the electricity distribution sector, which faces important barriers both in terms of physical infrastructure development and regulatory frameworks. Based on a cost-benefit assessment in line with EU Directive 2009/72/EG, Germany has chosen a modular approach requiring mandatory roll-out of smart meters by 2020 only for customers consuming more than 6 000 kWh per year. In addition, the current regulatory framework and remuneration model of network charges do not incentivise DSOs to be more proactive. Going forward, Germany needs to both accelerate the deployment of physical infrastructure and the reform of regulations in order to foster competition and new business models that can unlock the vast potential of demand-side response, and follow the example of other countries, which have implemented a faster roll-out of smart meters on a voluntary basis.

Important progress has been made in the recent EEG reforms, including achieving significant cost reductions thanks to competitive auctions. However, going forward much more additional capacity from wind and solar will be required. The phase-out of nuclear electricity generation is to be completed by 2022. The government coalition has announced a target of 65% of renewables by 2030. The government-appointed commission on coal has proposed a progressive phase-out of coal by 2038, with significant intermediate decommissioning milestones in 2022 and 2030. In this context, the issue of more system-friendly auctions has been discussed thoroughly and several concepts were tested, with the government concluding that grid extensions are the most economic measure. The government has decided that renewable resources should primarily determine the location of renewable installations, but at the same time introduced administrative auction caps in congested zones. Going forward, the government may also want to consider possible alternative and more market-oriented solutions.

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