Cost and cost distribution of policy-driven investments in decentralized heating systems in residential buildings in Germany

Abstract

To reduce emissions from residential buildings, Germany uses incentive-based policies, such as renewable energy requirements, subsidies, and ${\text{CO}}_2$ pricing. We analyze how these policies influence household decision-making regarding decentralized building energy technology and the resulting costs. We use a building-level mixed integer linear programming model to determine optimal investments and operation for decentralized technologies across a representative German residential building stock. We find that with renewable energy requirements, subsidies, ${\text{CO}}_2$ pricing, high medium-term gas prices, and moderate electricity price increases, many buildings benefit from early replacement of fossil systems with electric heat pumps, leading to rapid decarbonization. However, the costs of decentralized decarbonization vary widely: some buildings see net savings of up to $4,800$ EUR from 2020 to 2045 compared to a no-policy scenario, while others face substantial costs. For example, single-family homes with recently installed gas or oil systems, where early replacement with heat pumps is not feasible, could incur up to $11,000$ EUR in ${\text{CO}}_2$-related costs. Residents of multifamily homes with single-story gas heating may face ${\text{CO}}_2$ costs up to $8,000$ EUR per residential unit due to limited decarbonization options. Policymakers should consider these dynamics when prioritizing buildings for district heating or hydrogen in municipal heat planning or designing ${\text{CO}}_2$ price revenue recycling mechanisms.