The Power of Rules: Regulation as Consumer Protection in the Buildings Sector

The development of regulatory requirements in the building sector in Germany

Regulatory requirements in the German building sector have a long national tradition. Since the first Thermal Insulation Ordinance (WSchV) of 1977,¹ adopted in response to the oil price crisis, German legislation has used binding standards to reduce buildings’ energy demand. Subsequent EU legislation, particularly the Energy Performance of Buildings Directive (EPBD), reinforced and harmonised this approach, but built on an already established national regulatory framework.

The WSchV introduced minimum thermal insulation standards for building envelopes, initially focusing on new buildings. With the 1982 ordinance,² event-triggered requirements were introduced for existing buildings: minimum standards applied when components such as roofs, exterior walls or windows were renovated or replaced. This principle – no general renovation obligation, but binding standards when modernisation occurs anyway – remains central to German building regulation.

A further shift came with the Energy Saving Ordinance (EnEV³), introduced in 2002. It replaced a component-based logic with an integrated primary energy approach, making the overall energy performance of buildings and the CO₂ relevance of energy supply more important. The Renewable Energies Heat Act (EEWärmeG⁴) of 2009 added another dimension by requiring new buildings to cover part of their heat demand with renewable energies or equivalent substitute measures.

In 2020, EnEV and EEWärmeG were merged into the Building Energy Act (GEG⁵), mainly to harmonise and simplify the existing framework while transposing EPBD requirements, including the nearly zero-energy building standard. The 2023/2024 GEG amendment marked a more substantial change by extending the regulatory logic to heating systems: newly installed systems had to meet the 65% renewable energy requirement (hereinafter referred to as the 65% requirement). This requirement was subsequently repealed in 2026, as discussed below.

The design of the former 65% requirement

The 65% requirement (often referred to as the “heating law” in the public debate) obliged building owners to ensure that newly installed heating systems generated at least 65% of the heat provided from renewable energies or unavoidable waste heat. This obligation was triggered by the installation of a new heating system; in existing buildings, this typically occurred when an old heating system was replaced (in Germany, this mainly involves old gas or oil boilers).

The regulation was designed to be technology-neutral, meaning that it did not prescribe a specific heating technology such as a heat pump or district heating. Instead, it set a clear outcome-based requirement and left it to homeowners, companies and municipalities to decide how to meet that target. Permitted technologies included electrically powered heat pumps, connection to district heating, biomass heating systems, solar thermal systems, direct electric heating systems and hybrid solutions, provided at least 65% of the heat supplied was generated from renewable energy sources. Gas-based heating systems were also eligible, provided they could run on or be converted to green gases (e.g. biomethane or green hydrogen). Special arrangements addressed individual apartment-level heating systems (e.g. gas-fired boilers installed within each dwelling) and ownership associations, whose decision-making structures and technical situations are more complex than those of single-family or two-family houses.

The former 65% requirement and the implications of its repeal for the 2030 climate targets

The 65% requirement constituted a key element in relation to Germany’s national climate targets. The Federal Climate Action Act (Klimaschutzgesetz, KSG⁷) of 2019 established binding sectoral emission targets for the first time; for the building sector, a reduction to 70 Mt of CO₂eq was planned by 2030. Following its 2024 amendment, compliance with Germany’s national climate targets is assessed primarily through a cross-sectoral, multi-year accounting framework. Sectoral annual emission quantities nevertheless continue to serve as monitoring benchmarks while the national target of reducing greenhouse gas emissions by at least 65% by 2030 compared with 1990 remains unchanged.

In addition, the European Effort Sharing Regulation (ESR⁸) obliges Germany to significantly reduce its emissions in sectors not covered by EU emissions trading by 2030 compared to 2005 levels. This mainly applies to buildings and transport. Failure to meet the target would result in financial compensation obligations. The building sector is therefore under double pressure: nationally and under European law. The national and European target architecture is therefore relatively robust and difficult to weaken politically.

At the same time, the building sector has repeatedly failed to meet its emission targets in recent years (Bundesregierung 2025). The German government’s current greenhouse gas projections (2026 projection) show a shortfall of just under 18 Mt of CO₂eq for the building sector in 2030 in the ‘With Existing Policies and Measures’ (WEM) scenario (Förster et al. 2026). This WEM projection needs to be interpreted against the changed regulatory background. The modelling underlying these projections began in late 2025 and includes policies and measures that were sufficiently specified by October 2025. The subsequently adopted GModG is explicitly not included in the projections. Consequently, the projected mitigation effects attributed to the GEG and, in particular, to the 65% requirement describe the expected effect of the former regulatory framework rather than the emissions trajectory under current legislation. Within that former framework, the GEG was projected to make one of the largest contributions to emissions reductions in the building sector by 2030, with the 65% requirement accounting for the largest share of its effect; the BEG support programme constituted the other major instrument. At the same time, even these projections indicate substantial remaining mitigation pressure in the building sector.

At the time of writing, the government projections do not yet provide a quantified assessment of the regulatory framework introduced by the GModG. To the extent that the new framework delivers lower emissions reductions than the former one, however, the difference will have to be compensated by stronger effects from other policy instruments or other sectors if the national and European 2030 targets are to be met. The regulatory change therefore does not reduce the relevance of the question addressed in this paper. Rather, it illustrates why the design of regulatory standards matters for the consistency between long-lived individual investment decisions and binding long-term climate objectives.

Regulations protect against uninformed investment decisions

When building owners compare various renovation options (e.g. different heating technologies) as part of a full cost comparison, the result depends largely on the assumed future energy prices. For gas heating systems, this is the future development of the gas price, including the development of the CO₂ price; in the case of heat pumps, it is the development of the electricity price (against the backdrop of the ongoing decarbonisation of the electricity system).

However, the development of the CO₂ price is determined endogenously: the weaker the effect of other climate policy instruments, the more the CO₂ price must rise in order to meet emission targets (see, for example, Günther et al. 2025). For private owners, these dependencies are often difficult to understand, making future CO₂ price developments hard to predict. Furthermore, empirical evidence shows that building owners often extrapolate current energy prices or short-term trends and therefore base their investment decisions on incorrect energy price projections (e.g. Wehrhöfer 2023; for gasoline Anderson et al. 2013). Under this assumption, gas boilers often appear to be cheaper or at least less risky investments than heat pumps.

The contrast becomes even more pronounced when considering upfront investment costs alone (or in cases where immediate expenditures are weighted more heavily than future savings). In the case of heating systems, fossil fuel boilers are typically significantly less expensive than heat pumps or connections to district heating, at least in the absence of subsidies. For owners facing liquidity constraints, this cost differential can be decisive, as upfront investment costs constitute the primary barrier to adoption.

Thus, in the case of heating systems, the first decision criterion (full cost comparison) often leads to an investment decision in favour of fossil fuel heating technology, while the second criterion (investment cost comparison) almost always does so. However, many analyses under the specific German regulatory and market framework indicate that, based on realistic energy price assumptions – particularly when factoring in rising CO₂ prices – fossil fuel heating systems generally lead to higher total life-cycle costs than heat pumps (e.g. Thamling et al. 2023).

Regulatory requirements can, in principle, be designed to translate such expert knowledge into binding requirements for action. In doing so, they can help protect building owners from investment decisions based on incomplete information, uncertain price expectations or misjudgements. In the case of the former 65% requirement, however, this principle was not applied in full, as the regulation permitted potentially costly options such as biomethane and hydrogen-based heating systems under certain conditions.

The economic rationale: aligning regulation with natural investment cycles

Ideally, regulatory requirements take effect when a building component, such as a heating system, is due for replacement at the end of its technical lifetime. In this sense, the requirement is aligned with the natural investment cycle. For example, the former 65% requirement under the GEG applied when a heating system was being replaced in any case. The same principle applies to the GEG’s renovation requirements for the building envelope: these provisions take effect when specific components are renovated (e.g. external walls or roofs) or replaced (e.g. windows) as part of scheduled works.

Economic instruments, by contrast, affect either investment costs (e.g. through investment subsidies) or operating costs, particularly energy prices. A gradually increasing CO₂ price, for example, raises the operating costs of fossil fuel heating systems over time. However, especially in the case of CO₂ pricing, the price level may still be relatively low at the time a heating system is replaced, leading the building owner to opt once again for a gas boiler. If the CO₂ price subsequently rises sharply, the newly installed gas boiler may become uneconomical well before the end of its technical lifetime.

In such a scenario, incentives for premature replacement emerge, resulting in stranded assets and higher overall transformation costs. The capital stock is then no longer renewed in line with its natural investment cycle, but replaced ahead of schedule, generating avoidable depreciation losses. By contrast, the event-triggered nature of regulatory requirements allows capital stock turnover to be aligned with existing replacement cycles, thereby reducing the risk of economic inefficiencies associated with premature scrapping.

The climate policy rationale: ensuring target-compatible investment decisions

The preceding argument concerns the timing of regulatory intervention from an economic perspective. A distinct but related argument concerns whether the investment made at that point is compatible with long-term climate targets. Building components are characterised by long technical lifespans. Heating systems, for example, typically operate for 20 to 25 years, and often considerably longer. At the same time, Germany has committed to achieving climate neutrality by 2045. This temporal constraint implies that heating systems installed today may remain in operation until or beyond the target year, and that current replacement decisions must therefore be compatible with a climate-neutral building stock.

Continued investment in fossil fuel technologies therefore risks creating a long-term carbon lock-in: systems installed today may remain in operation well into the period in which the building stock must be largely decarbonised. The relevance of regulation from a climate-policy perspective therefore lies not primarily in the timing of replacement, but in ensuring that investments made at natural replacement points are compatible with long-term climate targets.

Regulatory requirements can prevent investments that are incompatible with binding long-term targets and enhance the consistency between short-term individual investment decisions and long-term transformation goals.

Regulatory requirements protect tenants

Additional market imperfections arise in the rental sector. Economic instruments, such as CO₂ pricing, primarily operate through price signals. In the German context, these signals primarily affect tenants, since heating costs are usually passed on to them through separate bills (in contrast to “warm rent” models, such as those common in Sweden, which are rare in Germany (Braungardt et al. 2022)).⁹ However, tenants do not make investment decisions regarding heating systems or the building envelope.

This is where the protective function of regulatory requirements becomes particularly relevant. Landlords generally have no direct economic incentive to minimise future heating costs if these can be fully passed on to tenants. As a result, investment decisions are often primarily guided by the objective of minimising upfront capital expenditures. In the context of heating system replacement, this frequently leads to the installation of gas boilers, shifting the burden of potentially high future fuel costs onto tenants.

While the investment costs of energy-efficient renovation measures or renewable heating systems can, in principle, be partially passed on to tenants, this requires active adjustment of rents and communication with tenants. By contrast, the allocation of heating costs is institutionally embedded and administratively standardised. As a result, operating cost pass-through is significantly more straightforward than the recovery of capital-intensive investments.

The CO₂ price signal therefore affects primarily the demand side, while leaving the investment decision-maker only indirectly exposed. This asymmetry weakens the effectiveness of price-based instruments in the rental sector. Regulatory minimum standards can correct these distorted incentives by directly targeting the investment decision. When appropriately calibrated, they require landlords to undertake investments that are efficient from a life-cycle cost perspective and that reduce long-term operating expenses. Given that rental shares are often particularly high in the least-performing buildings (e.g. European Commission 2021), such standards can also fulfil an important social protection function.

Regulatory requirements protect consumers from infrastructure-related consequences

The decarbonisation of heat supply is closely intertwined with the development and adaptation of key infrastructure systems. It is widely acknowledged that district heating networks must be expanded to ensure climate-neutral heat provision, especially in densely populated urban areas. In addition, the large-scale deployment of heat pumps (but also electric vehicles) will, in many regions, necessitate the reinforcement and upgrading of electricity distribution networks. By contrast, the future role of gas distribution networks remains highly uncertain.

The potential of sustainable biomethane is limited in Germany and is often allocated to other sectors in energy system analyses, particularly as a flexible renewable electricity generation option. According to the majority of scientific studies, hydrogen and other electricity-based fuels are unlikely to play a dominant role in decentralised space heating in the future (see, for example, Rosenow 2024). A recent Fraunhofer study estimates end-consumer prices for hydrogen in 2035 at 21 to 33 ct/kWh – a level that is very unlikely to be competitive with heat pumps (Pfluger et al. 2025).

A decline in gas throughput combined with largely fixed network costs inevitably leads to rising grid charges per kilowatt-hour. The magnitude of the increase can be substantial. For Germany, an independent study from 2023 estimates that grid charges could rise by a factor of 9 to 16 by 2045, depending on the age structure of the network assets considered (Agora 2023). For the Netherlands, the regulator ACM assumes that gas network charges to consumers could increase by a factor of 1.4 to 3.6 compared to current levels, under the assumption that all investments are fully depreciated by the time the infrastructure is decommissioned (Stobbe et al. 2024). As demand declines, the remaining users must bear a growing share of largely fixed costs, potentially leading to regressive distributional effects. In rented buildings, these effects primarily fall on tenants, who typically have limited influence over heating system choices.

Regulatory requirements cannot prevent this structural development, but they can at least mitigate the associated effects and make them predictable. By limiting the installation of new fossil fuel heating systems, regulatory requirements can avoid artificially prolonging gas demand. In combination with municipal heat planning and strategic decommissioning planning for gas distribution networks – as also laid down in European law (e.g. in the Energy Efficiency Directive) – the adjustment costs can be reduced and the burden on consumers from sharply rising grid charges at least minimised.