HomeDecentralized EnergyCogeneration CHPDistrict heating in Germany: a market renaissance

District heating in Germany: a market renaissance

Germany is probably the European leader in terms of its use of, and government support for, combined heat and power (CHP). So what is its position with regard to district heating? At the start of a major growth phase, suggest Werner R Lutsch and Stephan Orita.

The heating sector is the neglected giant of the energy world. Like the proverbial ‘400 lb gorilla in the room,’ it has long been ignored by policy makers in favour of other fields of activity. But almost 50% of the primary energy consumption in the European Union’s current 27 member states (EU 27) is used for heating. See Figure 1.

Figure 1. Primary energy consumption in the EU 27
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This is where the benefits of district heating (DH) come into effect. DH allows for the utilization of different energy sources, which could otherwise not be tapped. This holds especially true for the use of combined heat and power (CHP), which takes advantage of heat from electricity production to supply DH networks. Without DH, this energy potential would be wasted. Seeing that Europe wastes more heat in transforming energy than it consumes,1 the potential is indeed huge. A review of the DH situation in the EU 27 reveals the following figures:2

  • 75 million customers, 50 TWh of heat
  • 10% of the total heat demand
  • 16% market share in household sector
  • annual turnover of approximately €19 billion (US$26 billion).


Where does that leave Germany in the European context? Comparing the CHP share in DH in Europe, Germany comes out nearly on top with a share of 84% of CHP in its DH production. Germany is only beaten by the Netherlands, which boasts a CHP share of over 90% in its DH production. See Figure 2.

Figure 2. CHP share of district heating production in Europe Source: AGFW, EuroHeat & Power
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Comparing the share of electricity from cogeneration reveals a different scenario though. In terms of electricity production, Germany still relies mostly on big, central, coal-fired condensing plants and nuclear power plants. As a result Denmark takes the top position in a European comparison, with a share as high as 40%, closely followed by the Netherlands with 38% of the electricity generation coming from cogeneration. See Figure 3. Germany only resides in the lower mid-field, with 11% of its electricity production stemming from cogeneration.

Figure 3. CHP share of electricity production in Europe Source: AGFW, EuroHeat & Power
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Looking at these figures you have to bear in mind that in total Germany produces the most electricity in Europe. According to the International Energy Agency, 637 TWh of

Figure 4. Heating’s market shares in Germany
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electricity was produced in Germany in 2007, as opposed to 39 TWh in Denmark and 103 TWh in the Netherlands. These numbers still demonstrate that there is a lot of untapped potential for CHP in Germany. The DH market share is in a corresponding range, with the heating market being dominated by individual boilers operating with either fuel oil or natural gas ” see Figures 4 and 5.

Figure 5. District heating market share in Europe
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With the situation in the heating market in Germany leaving room for expansion, DH is in a starting position with good prospects:

  • DH connected load is approximately 57,000 MW thermal
  • DH customers are 46% private homes, 36% public buildings, commercial and trade sector, and 18% industry
  • DH network total length is approximately 100,000 kilometres. See Figure 6.

DH and CHP already help save large amounts of primary energy every year. A study of the Federal Environment Agency (UBA) entitled ‘Wirtschaftliche Bewertung von MaàƒÅ¸nahmen des integrierten Energie und Klimaprogramms (IEKP) ” Wirtschaftlicher Nutzen des Klimaschutzes’ (Cost analysis of measures in the Integrated Energy and Climate Programme (IECP) ” economic use of climate protection), revealed that DH and CHP are the key technologies for reducing CO2 emissions in a cost-effective way. Between 2008 and 2020, as much as 123 million tonnes of CO2 emissions can be avoided through the use of DH and CHP in Germany alone.

Currently, the use of DH and CHP in the urban sector in Germany reduces CO2 emissions by more than 10 million tonnes annually, while the primary energy demand is reduced by approximately 150,000 TJ annually.

According to the pilot study, 2008, ‘Weiterentwicklung der Ausbaustrategie Erneuerbare Energien’ (Strategy to increase the use of renewable energies), which was commissioned by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), a major conversion of individual on-site heating systems to district heating systems is required to meet the climate change goals. This is due to the fact that DH based on CHP is more productive both in terms of CO2 reduction and exergetic efficiency. Where heat supply via DH is possible and feasible, it should therefore be favoured, as a study of the Technische Universitàƒ¤t Dresden (TUD) reveals.

Micro-CHP installations suffer from an insufficient electrical efficiency, combined with thermal capacities that are too high for a lot of the applications, leading to short operating times. Therefore the energy demand has to be satisfied by additional measures. As a result, comparing CO2 savings over the whole system, and not just the CHP part, reveals the higher efficiency of DH supply based on CHP. See Figure 7.

The same holds true for an exergetic examination of the different technologies. See Figure 8.

The German Biomass Action Plan incorporates these findings and identifies the biggest potential for the efficient use of biomass in Germany in CHP. The advantages of larger-scale CHP plants include higher efficiency, and better filters to reduce emissions incorporated with the combustion of biomass.

DH and CHP not only benefit the climate and security of energy supply, but also the customer, as an analysis of the economic framework reveals. The weighted average district heating price for a connected load of 160 kW, amounted to €69.39/MWh ($96.3/MWh) in November 2008. There is a slight price difference between the eastern and the western parts of Germany due to different fuel choices. CHP plants in the eastern part of Germany have a higher proportion of natural gas in comparison the western part, resulting in slightly higher prices overall.

Figure 6. District heating in Germany
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Factoring in all variables and costs for DH, as well as individual boilers that use domestic fuel oil and natural gas (for instance maintenance, repairs or chimney sweeping), DH has retained a favourable cost structure, providing opportunities and room for manoeuvre. DH is a cost-efficient alternative, not only on an economic scale, but also on the consumer level.

Figure 7. CO2 savings of different technologies
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After a period of stagnating growth, the contribution of DH and CHP to the various issues of climate and energy policy will provide a more dynamic progression in the coming years. DH and CHP:

  • reduce primary energy demand as well as CO2 emissions
  • contribute to the security of energy supply
  • increase incorporation and use of renewable energy sources
  • and provide a cost efficient heat supply for consumers.

This development is supported by the regulatory framework involved with Germany’s IECP ” the renaissance of DH in Germany.


In order to understand why this development is to be considered a ‘renaissance’, a brief summary of the history of DH and CHP in Germany is necessary.

The development of public DH supply has a rich and long lasting history in Germany, going back as early as 1893, when the first ‘modern’ DH scheme based on CHP was established in Hamburg. Development of DH was set back by World War II but picked up quickly in the western part of Germany after the Nazi regime was defeated.

Comparable to a lot of European countries, the oil crises of the 1970s accelerated the development of DH and CHP in Germany further. The German reunification led to high investments for the much needed refurbishment of existing DH systems in the eastern part of Germany.

The next incisive development was the liberalization of the German electricity market, beginning in 1998. The liberalization caused a massive decline in prices for electricity. CHP plants were hit much harder by the market liberalization because the levelized costs of electricity from cogeneration are higher than those of large-scale power plants (like nuclear and coal-fired conventional power plants which make up the majority of the electricity market).

This is due to various reasons: specific losses in electricity occur when heat is decoupled from a condensing power plant. These losses are more than recouped in terms of primary energy used and CO2 emissions, when factoring in the use of surplus heat, but that provides for other disadvantages in pricing. CHP plants have to be built in the vicinity of the heat supply area to be effective. In comparison, large-scale power plants in the open countryside cause higher prices for houses, as well as stricter obligations in terms of noise and other emissions. Stricter obligations lead to higher investment costs, on top of the costs for the heat network.

So while CHP plants have a huge advantage in terms of overall efficiency and involve very low CO2 abatement costs, they are at a disadvantage in terms of prices when it comes to electricity production. Since the liberalization of the energy market failed to properly internalize external costs, the energy market was distorted in favour of the large-scale conventional electricity production.

Figure 8. Exergetic efficiency of different technologies
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The government passed a law (KWK-G) to create short-term incentives for the preservation of existing CHP plants to at least maintain the level of DH and CHP’s contribution to primary energy savings and climate protection. Since the KWK-G was only a temporary solution, a revised law was passed shortly afterwards (KWKModG). After a first review it became apparent that the KWKModG did help in preserving existing CHP plants but that the potential for CHP remained largely untapped.

AGFW (the German District Heating Association) was one of the few associations which provided recommendations, studies and researches to decisively accelerate the process and work on a favourable legislative framework for the expansion of DH and CHP. This was helped by the fact that AGFW incorporates all the different fields of the whole DH and CHP sector, from technical, economical to juridical level. The expertise of AGFW is acknowledged among policy makers and, with approximately 400 DH utilities, industrial companies, manufacturers and research institutes as members, representing 92% of the total connected DH load in Germany, the requirements of the sector and its contribution to the energy and climate targets were being considered and implemented in the political and legislative process.


The German government therefore put a strong emphasis on DH and CHP when it outlined the energy policy priorities of Germany in the Meseberger Resolutions (named after Castle Meseberg, where the German government held the conference leading to said Resolutions in August 2007). The three main objectives of the Meseberger Resolutions are: security of supply, economic efficiency and environmental sustainability.

The amended law on CHP (KWKModG 2009) set the goal of doubling the market share of electricity from cogeneration to 25%. AGFW stressed the importance of sufficient heat sinks for the targeted growth and the key role DH networks play. Increasing electricity from cogeneration to 25% will lead to a corresponding expansion of the DH market share to 18%”22% in 2020. See Figure 9.

Figure 9. Increasing CHP electricity up to 25% leads to a corresponding expansion of the district heating market share to 18%”22%
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As a result, the expansion and extension of DH networks is incentivized with an investment grant in the KWKModG 2009. As a precondition, the DH network must be supplied with at least 60% of heat from cogeneration in the final building stage and must begin operation on 31 December 2020 at the latest. If these preconditions are met, up to 20% of the costs, up to a maximum of €5 million ($7 million) per project, are granted on the basis of €1 ($1.4) per millimetre diameter and metre length of the DH pipe.

Under certain conditions, this incentive can be combined with the one for DH networks from the market stimulus package. The market stimulus package grants €60″€80 ($83″$111) per

metre length of DH pipe, up to a total of €1 million ($1.4 million) or €1.5 million ($2.1 million) (projects based solely on heat from geothermal installations) for loan redemption respectively. For each DH substation connected to a DH network promoted by the market stimulus programme, €1800 ($2500) is granted for loan redemption.

Development and modernization of CHP plants is incentivized with a CHP surcharge, paid for electricity from cogeneration. This CHP surcharge is not paid by the state in order to avoid problems with state aid legislation. In a circulation system, the distribution network operators (DNO) are required to accept electricity from cogeneration and pay a surcharge on top of the price for electricity to the CHP plant operator. The DNOs get paid by the transmission system operator (TSO) and the TSOs balance their payments among each other. Then they charge the DNOs, which in return charge their customers with the difference.

It may be confusing, but this rather complex system is necessary to charge all customers comparatively. The market stimulus package grants biomass CHP with more than 100 kW nominal thermal capacity of up to €40/kW ($55/kW) and up to €100,000 ($140,000) in total for loan redemption.

The new law on renewable energy sources in the heating sector (EEWàƒ¤rmeG) sets the goal of increasing the use of renewable energy in the heating sector from 6% to 14% in 2020 and is promoting the use of DH in conjunction with CHP. Minimum levels of renewable energy sources (RES) that have to be used to cover the heat demand of new buildings were introduced. These minimum levels can be fulfilled inter alia through DH under certain conditions, such as the DH network being supplied with at least 50% heat from CHP or by heat generated from significant amounts of RES.

CHP is being equated with RES since it also helps to reduce greenhouse gas emissions and primary energy consumption while enhancing the security of energy supply at the same time. The use of biogas can only fulfil minimum levels if it is being used in CHP plants. The EEWàƒ¤rmeG also regulates compulsory heat planning at a federal level, creating legal certainty for this instrument when used for global (and not only local) environmental protection.

The German government has created a favourable legislative framework for the expansion of DH and CHP with the KWKModG 2009, the EEWàƒ¤rmeG, and other means:

  • CHP surcharge for electricity from cogeneration
  • support for DH networks
  • fulfilling minimum levels of RES through DH
  • market stimulus for DH and CHP.


What has been achieved comes close to what the sector in Germany had expected and required for an expansion of DH and CHP. Our affiliated organizations are ready and willing to take this chance and to contribute to the energy policy targets.

Recent European legislation, and especially the European Union Emission Trading Scheme (EU ETS), have cast a shadow of doubt on whether these targets will be achievable though. CHP is a very special case because it produces both heat and power to reduce primary energy demand and CO2 emissions. But since the majority of the installations in the German heat market (all installations <20 MW, predominantly gas and oil-fired boilers) are not part of the system, these savings are not being represented. On the contrary: by doubling the market share of electricity from cogeneration, CHP will contribute to a significant reduction of CO2 emissions overall, but operators will still be required to buy more allowances. An oversight which AGFW has emphasized but unfortunately was not attended to in the rushed legislative process. Hopefully the negative impact can be lessened in the current negotiations on the implementation of the EU ETS Directive.

Werner R Lutsch is the Managing Director/CEO of the Association for Energy Efficiency in Heating, Cooling and CHP (AGFW), Germany.

e-mail: w.lutsch@agfw.de

Stephan Orita is the Legal Counsel Europe of the AGFW.


  1. ECOHEATCOOL, Euroheat & Power, 2005″2006. The study was co-financed by the Intelligent Energy Europe Programme and analyses the heating and cooling market in 32 European target countries
  2. AGFW/Euroheat & Power.