Deutschland 2025

As energy prices have risen in recent years, the argument that energy transitions undermine affordability and competitiveness has gained traction in the German public debate. In reality, however, there is an increased urgency for an energy transition, not only to address the climate imperative. Notably, Russia’s invasion of Ukraine and the ensuing energy crisis served as stark reminders of risks related to fossil fuel dependency. At the same time, the energy transition also provides an opportunity for German industry to gain competitive advantages in the clean energy industries of the future. Toward this end, amid the 2022/23 energy crisis, the German government correctly recognised that an acceleration of the energy transition offers the best longer term opportunity to regain competitiveness while bolstering energy security and keeping energy costs low. A number of strategies have been put in place to advance the energy transition, including plans to decarbonise the heating sector, expand renewable generation capacity, establish a national carbon pricing system and accelerate hydrogen development. The next stage of Germany’s energy transition will be to support affordable electrification, underpinned by sectoral roadmaps that also clarify technological alternatives where electrification is not feasible. To realise the tremendous opportunities that the energy transition will bring Germany, continuity in the policy and regulatory environment will be crucial to providing a stable, long-term investment environment. The government should continue to progress the future electricity market design proposals and ensure that there is a clear and stable investment framework for renewable electricity generation and supporting technologies as coal is phased out over the coming years. Likewise, long-term stability in funding and price signals will also be necessary to support certain technologies, including heat pumps, district heating and electric vehicles. Germany should also ensure sufficient, strong backing to energy-related research and innovation to maximise opportunities for industrial competitive advantages. Clear and transparent communication on the costs, benefits and time frames of the energy transition will also help ensure public support for the energy transition and the policies that support it.

Germany’s transport sector is a clear sectoral laggard from an emissions reduction perspective. To reduce emissions in line with climate targets, the strong dominance of oil will need to be drastically cut by a range of policy measures. To start, Germany should significantly ramp up efforts to upgrade rail and public transport infrastructure to support modal shifts away from the heavy reliance on road transport, which accounts for nearly 95% of domestic transport emissions. This should be supported by long-term and stable funding packages.

In the road transport segment, EVs are expected to play the largest role in decarbonisation. The government concludes that to meet the sector’s climate target, basically all new cars should be electric by 2030. However, Germany removed its previous purchase incentives for EVs at the end of 2023, following the court ruling on KTF funding, and EV sales have recently slowed down. The government should provide alternative long-term budget-neutral measures to accelerate EV uptake, for example, a bonus-malus tax structure for vehicle purchases that incentivise sales of low-emissions alternatives over fossil fuel vehicles. New measures should target not only privately purchased cars, but also leasing and company cars, which account for the majority of cars in the German market. EV sales should be complemented by faster deployment of charging infrastructure, building off the Charging Infrastructure Master Plan (and ensure sufficient planning co-ordination with the electricity system). Germany should also explore options to increase the role of sustainable biofuels in transport. While its GHG quota policy is an effective way to increase the share of renewables in transport fuels, the government should ensure even treatment of compliance options. More specifically, it should increase transparency around the rationale for multipliers or consider alternative options such as linking support to consistent, third-party certified GHG life cycle assessments of different types of renewable fuels. More broadly, the transport sector would also benefit from closer co‑ordination across ministries with jurisdiction in this area, complemented by stable financial support.

Natural gas still retains a large role in Germany’s energy system, accounting for roughly a third of final energy consumption, with large shares in the electricity, industry and buildings sectors. However, Russia’s invasion of Ukraine and the ensuing energy crisis in Europe highlighted the considerable risks that stem from natural gas import dependency. Even with more import diversification through LNG, Germany still remains exposed to high natural gas prices amid periods of tight global supply. In line with emissions targets, the government’s gas diversification strategy was based on the ability to convert LNG import terminals to receive hydrogen down the road.

Germany could benefit from a broader strategy on the role of natural gas in the energy transition, including time frames and expected prices, to underpin its policies supporting the development of renewable energy. Such a strategy should also address the financial impacts of decommissioning natural gas infrastructure that cannot efficiently be repurposed, to avoid such impacts from creating the wrong incentives for future-proof investments.

On the demand side, while Germany has recently developed a clear roadmap to wind down natural gas dependency in its buildings sector through heat pumps and district heating, the industry and power sectors still face uncertainty on the role of natural gas through the energy transition. The industry sector, in particular, is facing growing threats to competitiveness, in part stemming from high natural gas costs. A more concerted effort to promote energy efficiency and electrification (see the recommendation on lowering electricity prices) in the short term, along with increasing the penetration of hydrogen and CCUS in the longer term, represent viable pathways, but at present, the continued dependency on natural gas remains without a clear end in sight (though the EU ETS will erode its role over time). Additional clarification on the natural gas exit ramp for the industry sector, including time frames, would provide industry with the certainty needed to make future-proof investments, including in required import infrastructure (for both natural gas and hydrogen) and industrial clusters.

In the power sector, unlike coal, Germany does not have a discrete policy or roadmap to exit from natural gas generation, though the target of 100% fossil-free generation by 2035 suggests that the exit will need to take place over the coming decade. The EU ETS will be the primary driver for declining natural gas generation. At the same time, these plant closures (alongside rising demand) are raising concerns about generation adequacy. The government’s previously planned Power Plant Strategy attempted to address this issue by tendering 12.5 GW of new natural gas-fired power plant capacity that could later run on hydrogen. In this way, the construction of new hydrogen-ready gas-fired capacity could avoid a fossil fuel lock-in that is not at odds with the electricity generation target, as long as the fuel switch takes place on time. This indicates that hydrogen will play a role in Germany's future power system but clarification is needed to what extent, given other competing uses in the next ten years, raising some questions around the viability of hydrogen-ready gas plants. Moreover, a broader look at adequacy is needed to include other flexibility options such as industrial demand response, storage and interconnections (see recommendations on electricity), which may displace the need for additional generation capacity. While gas plants might very well continue to play a role in grid balancing beyond the 2035 time frame, investors need more long-term clarity on the future role of natural gas in the electricity mix. With this in mind, the government should move ahead with the future electricity market design proposals, including a capacity mechanism, and explain how these planned capacity auctions might impact the need for additional dispatchable generation capacity (see the electricity section for more details).

German consumers face among the highest electricity prices in Europe. Already, the government has taken a significant and welcome step toward alleviating prices by removing the EEG surcharge. Energy-intensive industrial consumers also receive various forms of relief and compensation for electricity prices. Nonetheless, high prices persist across all consumer segments. Not only do high electricity prices impact affordability and competitiveness, but they also serve as a major obstacle for the electrification needed to realise energy transition goals. To start, the government could consider lowering taxes on final electricity prices to support affordability, competitiveness and electrification outcomes.

Moreover, compared to other countries, Germany faces relatively high grid fees. This is partly due to legacy costs of past grid expansion investments to accommodate the shifts in power generation that the country has experienced. On top of this, regional imbalances and still insufficient grid capacity create large inefficiencies and hefty congestion management costs that are also reflected in grid fees. Moreover, as Germany looks to a massive new expansion of both the transmission (including to accommodate offshore wind) and distribution grids, over EUR 400 billion in new costs will have to be socialised through grid charges. Therefore, a priority for the German government should be to explore all possible options to quickly soften the impact of grid charges on consumers, working with the regulator (which oversees grid fees). For example, the government could consider absorbing some of the charges into the state budget, which would help alleviate near-term challenges. Innovative frameworks such as the amortisation account used to finance the Hydrogen Core Network could be explored to finance new electricity lines too (both public and private financing). To avoid further increases in grid costs, the IEA also encourages the government to look at ways to use the existing grid as efficiently as possible. 

Building new grid lines takes lots of time and money. To manage the energy transition with rapid growth in variable renewable generation, distributed renewable resources and significant electrification of end-use sectors, the existing grid infrastructure needs to be used as efficiently as possible. This requires a more concerted effort to ensure that electricity assets are sited where they best serve grid needs and align with future grid development plans. One method for doing this is to ensure that new grid connections are located in places that support efficient grid operation now and in the future. The government should explore the possibility of including locational signals for new renewable power generation in forthcoming renewables auctions, while being careful to avoid barriers to the deployment of new renewable energy sources. Batteries and electrolysers will also increase significantly in the coming years and can play an important role in balancing the electricity system and improving grid use. Germany subsidises these technologies by exempting them from grid connection fees. For new connections, the support should be tied to locational needs, so that new connections only receive grid fee concessions in locations that the system operator deems suitable to optimise grid operation.

The industry sector can play a role in locational flexibility. Currently, a sizeable disincentive for flexible industrial demand (beyond structural ones) is the Grid Charges Ordinance that offers grid discounts to large consumers for steady, baseload demand. While removing the concession could further erode the competitiveness of an already ailing sector, the government should still explore options to offer incentives to these consumers to manage demand in ways that support grid-balancing needs.

Finally, locational signals can also be provided by bidding zones in the electricity market. Having multiple bidding zones can attract new investments in areas suitable for the electricity system and provide benefits to efficient electricity market operation such as reduced redispatch and curtailment costs. Such a split could also present attractive opportunities to site new green industrial facilities in more parts of Germany, a prospect that is currently hamstrung by the prevailing configuration. Potential price impacts and related mitigation measures for industries also need to be considered. Therefore, Germany should adopt an open-minded approach and take evidence-based decisions regarding a potential bidding zone split.

Germany has not to date taken advantage of the considerable flexibility solutions that demand-side management could provide to efficient power system operation. For households, as behind-the-meter resources (solar panels, heat pumps, electric vehicles) continue to surge, they represent an important opportunity to support efficient power system operation. In this regard, the government should quickly remove barriers to participation by households and aggregators that can unlock these services, including lowering regulatory hurdles or increasing incentives. For example, the government could look into grid fees of behind-the-meter home batteries and vehicle-to-grid charging. The rollout of smart meters will be a key enabler of demand response. Though recent reforms have set out a plan for ramping up smart meter deployment, the timelines should be accelerated, including by putting in place more measures to push smaller DSOs to ramp up deployment. Beyond just installing smart meters, regulations should also support access to and use of smart meter data for both consumers and grid operators. A shift toward time-of-use pricing and dynamic tariffs could also bring important cost savings for electricity consumers.

An important element to encourage behind-the-meter flexibility is improving the integration of consumer systems into the distribution grid. In the German context, ensuring that distribution grids are fit-for-purpose through the energy transition will be at least as important as expanding transmission grids. Moreover, efficient investment in distribution systems can, to some extent, reduce the need for transmission expansions. To this end, not only will the government need to address regulatory impediments for consumers, but it will also need to facilitate upgrades by (numerous and varied) DSOs, leveraging recent efforts at regional scenario planning. In addition, regulation to allow smart meters to be used by grid operators to control distributed photovoltaic supply should also be considered.

Considering the extent of variable renewables generation in Germany’s electricity system, which already exceeded 60% in 2024 and is planned to be 80% in 2030, the country has relatively low levels of large-scale electricity storage (1.7 GW with 2.2 GWh in January 2025). Notably, battery storage can offer near-term solutions to grid management and flexibility services that grid expansions would take years (and substantial costs) to achieve. Recent reforms to allow storage to participate in frequency response and services markets bolster the market case for investments as will other efforts such as the grid booster initiative, innovation tenders and using storage for energy management at large industrial sites. Capacity under these programmes should be expanded and their applications broadened (to cover both grid stability and market participation) to promote faster deployment and ensure that there is a route to market for the required level of storage to support electricity system needs. The government could look to the Italian model under which the TSO TERNA will run utility-scale storage tenders targeting locations that are optimal for the system, as well as Ireland’s Electricity Storage Policy Framework and related measures that support flexibility in systems with high levels of variable renewable generation. To further deliver on a more rapid buildout of storage assets, the government should also fast track the implementation of measures identified in its electricity storage strategy and accelerate grid connections to unlock projects in optimal locations awaiting connection (around 24 GW are considered to be viable out of a total of 160 GW requests) and remove barriers to the further construction and operation of pumped storage units. Supporting and investing in research on emerging storage technologies and boosting target volumes for long-duration energy storage will also be important enablers for increasing system stability and adequacy. 

With the Heat Planning Act, Germany made tremendous progress toward providing clarity on the energy transition needed in the heating sector. In 2026-28, close to 11 000 municipalities will present plans for how to decarbonise their heating systems. This presents a critical opportunity for the government, consumers and industry stakeholders to take stock of the situation and take strategic decisions on policy development and investments. It equally presents an opportunity to engage with consumers and with citizens more actively in the energy transition. Notably, the plans are expected to provide important bottom-up clarity on the optimal mix for energy efficiency, electrification, district heating (including the role of waste heat) and other direct renewable heat. The government should capitalise on this opportunity by supporting and co-ordinating timely development of the plans at the federal level and ensure sufficient resources for all levels of government to develop, assess (where necessary) and implement the plans. Similarly, regional co-ordination on implementation of the plans can be necessary for optimal resource allocation. The heat planning should also be aligned with other energy system planning, such as regional electricity network development plans. Following an assessment of the first round of plans, the government might consider making the updated plans (due after five years) more binding to drive investments. Furthermore, the government may consider aligning the plans with existing funding schemes directed at heating technologies and explore possibilities to use heat plans as the basis for large-scale technology procurement. Lastly, the effort to develop the plans should also be used as an opportunity to consider plans for cooling networks, whose needs will grow in the coming years.

As a starting point for decarbonising individual homes, the government should support energy efficiency upgrades in conjunction with the rollout of heat pumps and connections to district heating. Toward this end, the government should back the role of energy advisors in helping homeowners undertake renovations and install heat pumps (or other renewable heating systems). Electricity will be the most efficient and scalable option for decarbonising heating, especially in decentralised heating systems. The strategy to expand heat pumps should be mindful of the valid affordability concerns of homeowners. Therefore, complementary to its messaging around heat pumps being the preferred technology option for decarbonising heating, the government should clarify to consumers the policy measures that will help support the deployment of heat pumps to alleviate household concerns over upfront and operating costs. Though the government does not promote the use of hydrogen in home heating systems under its hydrogen strategy, the “technology-neutral” approach applied in the Buildings Energy Act can be perceived as sending mixed signals about the possible application of hydrogen in home heating, thereby delaying the investment case for switching to heat pumps today. As such, the government should pursue clear and explicit messaging that electrification will be the viable pathway for future decentralised heating systems. Relatedly, to avoid a lock-in effect to fossil fuel boilers, the government should also communicate to households the longer term business case for heat pumps and connections to district heating in a context where CO₂ prices for heating fuels will rise (under the ETS2) and electricity prices are expected to fall (including through government efforts to alleviate fees and taxes). 

Germany’s updated Hydrogen Strategy takes a comprehensive approach to fostering the development of a hydrogen economy, and the H2Global mechanism and amortisation account to finance the Hydrogen Core Network are innovative frameworks. However, final investment decisions by potential end users are lagging due to concerns about sufficient supply at affordable prices. At the same time, domestic production projects are failing to materialise as they lack strong commitment from offtakers. Additional measures are needed to jump-start investments in the market ramp-up phase, notably in the area of demand creation.

Germany is right to focus its efforts at hydrogen demand creation on industry, where some sectors have few decarbonisation alternatives. The government should closely co‑ordinate with the country’s industry sector to align strategies and policies with industry expectations and plans for sectoral decarbonisation. Germany can build upon successful existing programmes. Importantly and uniquely, Germany’s Carbon Contracts for Difference cover not only capital expenditures but also operating expenditures, which has been key to the programme’s successful uptake and deployment. Germany should move forward with a hydrogen-specific carbon contract for difference and consider allocating additional funding toward it.

The public sector could play an important role in supporting hydrogen demand by introducing “lead markets” for climate-friendly basic materials, establishing definitions, aligning on standards and criteria for materials produced with renewable or low‑emissions hydrogen. Public procurement tied to this could create dedicated demand for products such as climate-friendly (“green”) or low-emissions steel and cement in the early years of market development, when broader demand is limited, notably through large infrastructure spending from state entities (e.g. rail infrastructure). The final price impact on some end-use products that use green materials – such as cars using green steel – is limited, so standards and targeted fiscal measures could promote more private demand too.

Germany should, in its strategies and communication to the public, maintain a clear focus on the use of hydrogen over time, where no suitable alternatives exist, as it will likely remain a scarce resource. In addition to its use in certain industrial sectors, hydrogen can provide seasonal storage and much needed flexibility in Germany’s future electricity system. At a later stage, hydrogen derivatives will play an important role as maritime and aviation fuels. The IEA is, however, less convinced of a significant role for hydrogen in Germany’s wider transport sector, and even less in space heating.