Building Modernization Act: Are gas heating systems acceptable again?

1 I Executive Summary

If the new law is passed in summer, gas and oil heating systems will once again be permitted. This will not play a major role in new construction, as EU regulations apply there—heat pumps and district heating are expected to remain the dominant options. In existing buildings, however, fossil fuel heating systems may be installed again.

However, starting in 2029, these systems must be fueled with at least 10% green gas or oil (e.g., biomethane). Since such fuels are scarce and needed for other industrial processes that are harder to decarbonize than building heating, most energy market experts expect biomethane to be very expensive (similar to hydrogen, often referred to as the “champagne of energy sources”).

Demand will increase further because, under the amendment, a mandatory minimum blending quota of 1% bio-based fuels will apply to all fuel sales. In addition to rising CO₂ costs, the fuels themselves will therefore become more expensive.

For building operations, this means that ancillary costs for fossil fuel–heated properties are expected to rise significantly—especially from the 2030s onward. From an investment perspective, this represents a risk that, in most cases, I would not recommend to our clients.

“Bio Staircase” for New Oil and Gas Heating Systems

• New gas or oil heating systems may be installed again. However, from 2029 onward, they must be operated “with a gradually increasing share of climate-friendly fuels such as biomethane and synthetic fuels (‘bio staircase’).”
  
• As of 2029, this share must be at least 10 percent. The federal government will define further increases in three steps up to 2040 at a later stage in the legislation. As a result, there is currently planning uncertainty regarding both the trajectory and the maximum level of this “staircase.”

 Oil and Gas Heating in Existing Buildings – Green Gas / Green Heating Oil Quotas 

• A “moderate green gas quota and green heating oil quota” is planned. These obligations will apply to the suppliers of natural gas and heating oil—i.e., the energy sector—rather than to building owners.
• “Green gas” and “green heating oil” include biomethane, hydrogen in its green, blue, orange, and turquoise forms, hydrogen derivatives, as well as synthetic methane and bio-oil.
• The quota is set to start in 2028 at up to 1 percent, following a gradual ramp-up pathway. However, the outline paper does not provide specifics, leaving uncertainty about how high the quota will rise and what level of market demand it will generate. 

District Heating

The coalition plans reforms and simplifications in the district heating sector and states its intention to balance the interests of both consumers and district heating providers.

New Construction Requirements

No further tightening of the building envelope standards for new construction is planned. The current EH55 standard will remain in place.

Municipal Heat Planning

References to municipal heat planning will be removed from the GMG. However, the law itself will continue to exist separately. Simplified procedures are planned for smaller municipalities.

3 | Interpretation for Investors and Tenants, Including Numerical Examples

The key question is: With the planned legislative changes, will fossil fuel heating systems once again become viable alternatives for residential and commercial properties owned by our clients? Does this reduce the pressure to retrofit heating systems from an investor’s perspective?

In the short term, the required capital expenditure (capex) is reduced, as new gas heating systems for existing buildings are generally cheaper than heat pumps; even with subsidies, there is usually still a cost gap. However, it is to be expected that operating heating costs will rise significantly. An estimate:

Relevant sind zwei Faktoren der Kostensteigerung, welche mit Annahmen für die zukünftige Preisentwicklung abgeschätzt werden:  

2) Higher gas fuel costs due to the regulatory requirement to blend in biomethane or similar fuels. The assumptions in the table are validated estimates, but how the market will actually respond remains uncertain.

Calculation Example: Office

 

To get a sense of the cost increase relative to office rents, it is useful to translate these values into additional costs per m² per month. For an average office with a heating demand of 120 kWh/m²a, the following additional costs arise:

As a result of the expected price increases from the CO₂ tax and the biomethane surcharge, ancillary costs in office buildings would rise by approximately €1/m² per month.

Calculation Example: Apartment in a Multi-Family Building

For a 70 m² apartment with a heating demand of 140 kWh/m²a, the additional annual costs would amount to €120–590 due to the CO₂ tax, and €140–680 due to higher gas fuel costs.

To give a sense of the additional burden on tenants, these heating cost increases are set in relation to typical average rents in various German cities in the table: 

Conclusion

The initiative by the CDU/CSU and SPD effectively constitutes an investment moratorium. It reduces the short-term financial burden on property owners but shifts the cost burden to the operational phase in the 2030s. From an investor’s perspective, this means postponing the necessary transformation costs into the future while simultaneously reducing the market attractiveness of the property due to higher operating costs.

For individual investors, as well as for Germany as an industrial location overall, this creates a risk: investment decisions continue to favor fossil-based technologies, while global markets—and the cost curve—are clearly moving toward electrification.