Energy policy put to the test: Four problem areas, one system failure – Between centrally planned control and regulatory overload
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Prefer Xpert.Digital on GoogleⓘPublished on: July 10, 2026 / Updated on: July 10, 2026 – Author: Konrad Wolfenstein
Energy policy put to the test: Four problem areas, one system failure – Between centrally planned control and regulatory overload – Image: Xpert.Digital
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Germany in the summer of 2026: The energy transition, the most ambitious economic project of the post-war era, threatens to become entangled in a thicket of government micromanagement and regulatory overload. Instead of paving the way for the market and private investors with reliable, technology-neutral framework conditions, the state is intervening ever more deeply and in an uncoordinated manner in technological details. Whether it's the costly new capacity market for power plants, the constitutional gray areas of the recently revised Building Energy Act, the constant and unpredictable back-and-forth regarding subsidies for heat pumps, or the bureaucratically stifled "energy sharing" initiative: all the symptoms point to a chronic system failure. This is a stark assessment of a policy that, through its obsession with centrally planned details, is creating precisely the uncertainty it was intended to eliminate – with disastrous consequences for the climate, the economy, and consumers' wallets.
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When the state becomes the biggest obstacle to its own transformation – an uncomfortable assessment of German energy policy in the summer of 2026
The transformation of the German energy system is among the most ambitious economic policy projects in postwar history. Measured against the targets – climate neutrality by 2045, a complete phase-out of coal, decarbonization of the building sector, and the widespread deployment of renewable energies across all grid levels – the volume of investment that would need to be mobilized in the next two decades is staggering. At the same time, however, each of the four current energy policy decisions dominating parliamentary and regulatory proceedings this summer of 2026 exposes the same systemic problem in its own unique way: The state is gradually assuming tasks that should belong to the market, doing so with increasing obsession with detail, and thereby creating precisely the planning uncertainty and allocation inefficiency that it actually intended to eliminate through its intervention.
The four issues – the new Electricity Supply Security and Capacity Act (Strom-VKG), the Building Modernization Act (GModG) saved by the Federal Constitutional Court, the fundamentally restructured heat pump subsidy program, and the regulatory stumble of energy sharing – are not isolated incidents. They are symptoms of the same underlying problem: a political system that gets bogged down in the operational management of detailed technological decisions and, in doing so, damages the fundamental institutional prerequisites for private investment.
Nine gigawatts on command: The state-run capacity market as a necessary evil with avoidable design flaws
With the passage of the Electricity Supply Act (Strom-VKG) by the governing coalition of the CDU/CSU and SPD, Parliament has passed a resolution whose energy policy implications can hardly be overestimated. A total of nine gigawatts of secured power plant capacity are to be tendered this year, 2026 – divided into two tranches of 4.5 gigawatts each, with tender dates on September 8 and December 29. A further tender for two gigawatts will follow in May 2027. The new plants are to be kept available for a period of 15 years and must be hydrogen-compatible; completely climate-neutral operation is mandatory from 2045 onwards. The law thus links the immediate urgency of security of supply with the long-term goals of decarbonization – a requirement that, upon closer examination, creates considerable tension.
The fundamental justification for government intervention stems from a well-known market failure: the so-called missing money problem in the energy-only market. A supply structure increasingly dominated by photovoltaic and wind power generation produces near-zero marginal costs for many hours of the year. Conventional power plants, which only fulfill their role as reliable reserve capacity during the relatively few hours of periods of low wind and solar output or sharp demand peaks, can no longer refinance their high fixed costs under these market conditions. Without additional government compensation for the mere existence and availability of capacity, a gradual capacity shortage threatens, posing real supply risks for energy-intensive industrial locations. In this respect, the capacity mechanism is not a luxury, but a systemic necessity.
The economic criticism, however, focuses not on whether the law should be passed, but on how it is implemented. The German Association of New Energy Industries (bne) and solar energy associations have unanimously criticized the fact that, despite some recent improvements, the tendering system is structurally geared towards gas-fired power plants. While the originally proposed ten-hour criterion for storage technologies – the requirement that battery storage systems be able to supply electricity for at least ten consecutive hours – was softened during the parliamentary process, requiring systems to be recharged to 80 percent only after three hours instead of a one-hour interruption, Carsten Körnig, CEO of the German Solar Association (BSW-Solar), soberly observes that genuine technological neutrality is lacking and that battery storage systems remain structurally disadvantaged in the planned power plant tenders. Although the reduction factor for battery storage is formally higher at 0.89 than for gas-fired power plants (0.85), the basic tendering system with its requirements for minimum output and continuous availability still favors conventional generation.
Even more serious is the uncertainty under European law. The Electricity Supply Act (StromKG) stipulates a minimum quota of 50 percent for components manufactured in Europe. These resilience criteria, which also apply to gas-fired power plants and no longer exclusively to renewables, represent a potentially unlawful intervention in the EU internal market. Whether the European Commission will grant state aid approval for this instrument is still open at the time of the Bundestag's decision – a significant risk to the investment horizon of plant operators. Furthermore, the last-minute increase in the bid cap from €173,000 to €244,000 per megawatt before the vote signals that the government's initial cost estimate was too low. With regard to the tendered total capacity of eleven gigawatts, the new upper limit results in an annual cost volume in the order of tens of billions of euros, which must be covered either by a surcharge on network charges or by direct budgetary funds – a burden that puts further pressure on the already high German industrial electricity price.
The resistance from the opposition parties is noteworthy in this context. Not only the Left Party and the Greens, but also the AfD voted against the law – albeit for diametrically opposed reasons. The Greens criticized the lack of technological openness and an inadequate climate pathway, while conservative critics objected to state intervention and excessive costs. This political constellation illustrates that the capacity market is not a technically neutral solution, but rather a highly controversial political project that has significant distributional effects between technologies, actors, and consumers.
Constitutional Court protects a law that climate experts consider dangerous: The dilemma of the building modernization law
The failure of the Left Party's constitutional complaint against the Building Modernization Act before the Federal Constitutional Court means that, from a formal perspective, the law is now clear to proceed. However, this legal decision achieves nothing in terms of substance. The court found that the plaintiffs had not sufficiently demonstrated their need for legal protection – a purely procedural dismissal that makes no definitive statement about the constitutional substance of the law itself. This comes despite the fact that the Climate Union, a non-partisan association of climate and legal experts, had already expressed its assessment in a brief report published in May 2026 that the Building Modernization Act, in its current form, was almost certainly unconstitutional. The core thesis of this expert opinion: The complete elimination of the 65 percent renewable energy requirement for heating systems creates a structural regulatory gap that allows the continued operation of existing fossil fuel heating systems indefinitely beyond the constitutionally mandated end date for climate neutrality in 2045 – a violation of the Federal Constitutional Court's 2021 climate ruling.
The GModG (Building Energy Modernization Act) is the attempt by the CDU/CSU and SPD coalition to fundamentally restructure the Building Energy Act passed by the previous coalition government. The 166-page draft from the Ministry of Economic Affairs immediately abolishes the central 65 percent renewable energy requirement and replaces it with the concept of the so-called "bio-staircase": Newly installed gas and oil heating systems must use ten percent climate-neutral fuels such as biomethane or synthetic fuels from January 2029; this share increases to 15 percent by 2030, to 30 percent by 2035, and is intended to reach 60 percent by 2040. In addition, landlords are obligated to contribute 50 percent to the resulting CO2 levies, gas network charges, and the costs of the biogas component when installing new fossil fuel heating systems.
From an economic perspective, the German Energy Modernization Act (GModG) harbors several structural risks that extend beyond the political debate. The most fundamental problem lies in the availability and price of the planned climate-neutral substitutes. Malte Küper, an energy and climate economist at the German Economic Institute (IW) in Cologne, and his colleagues have calculated that the quantities of biomethane and synthetic fuels required by the bioenergy transition in the building sector are simply not available in sufficient quantities. At the same time, scarce biomass and green hydrogen are needed for sectors where no technological alternatives exist—aviation and shipping, as well as basic industrial chemicals and steel production. Artificially driven increased demand from the heating sector would drive up the prices of these strategic resources, thereby trapping households in excessive costs and increasing the expense of decarbonizing other key industries.
The German Council of Experts on Climate Protection has presented a politically sensitive quantitative assessment: The independent panel believes the German government's assumed climate protection impact of the German Climate Change Modernization Act (GModG) is overly optimistic. The emission levels permitted under the German Climate Protection Act will likely be missed by 60 to 100 million tons of CO2. Such a shortfall has immediate fiscal consequences, as Germany would face substantial penalty payments to the EU under the European Effort Sharing Regulation if it continues to fail to comply. The Ministry of Economic Affairs itself admitted that the law does not yet contain any provisions for the period after 2045 and that further stages of the bioenergy transition are to be defined at a later date – an open-ended regulatory framework that forces investors to make long-term decisions based on incomplete information.
The core institutional economic message behind this finding is this: The German Building Modernization Act (GModG) attempts to correct a market failure in the building sector through the instrument of rolling technology requirements via the "bio-staircase" (a system of increasing biogas production). However, by permitting oil and gas heating systems beyond 2029, it simultaneously establishes a path dependency that will undermine the long-term economic viability of these systems due to rising CO2 prices and spiraling green gas costs. The lock-in effect is foreseeable: Anyone installing a new gas heating system today will face high operating costs in twenty years due to expensive blending requirements or will have to invest again. This is not an efficient allocation of national economic resources.
Social redistribution instead of climate control: The reformed heat pump subsidy and its economic consequences
Rarely has a funding reform intervened so abruptly and profoundly in ongoing profitability calculations as the new regulation on government support for the installation of climate-friendly heating systems. Between July 9 and 20, 2026, the KfW (German Development Bank) portal was completely deactivated for new applications, as KfW and BAFA (Federal Office for Economic Affairs and Export Control) had to adapt their systems to the new conditions. Fundamentally new rules apply from July 21, 2026.
The key points of the reform are clear: The maximum eligible investment costs for the first residential unit will decrease from €30,000 to €28,000 and will subsequently be reduced by a further €750 every six months until they are significantly lower in 2030. The climate speed bonus, which was previously 20 percent, will start at only 16 percent after July 21 and will also be reduced by four percentage points every six months. The efficiency bonus for heat pumps with particularly efficient technologies such as natural refrigerants and the emissions reduction surcharge for biomass heating systems will be completely eliminated. These environmentally motivated bonuses will be replaced by a significantly expanded, income-based subsidy system. Households with a taxable annual income of up to €30,000 will receive an income bonus of 40 percent, which will decrease to 10 percent in further stages up to €50,000. In addition, a family supplement was introduced: For each minor child, the relevant income limit is increased once by 10,000 euros.
The consequences for the cost-effectiveness calculations of private households are significant. A high earner with a taxable household income exceeding €50,000 and no children will receive a maximum subsidy of €12,880 for their heat pump from October 2026 onwards (€28,000 in eligible costs with a 46 percent subsidy rate consisting of basic funding and a reduced climate speed bonus). By April 2027, this maximum subsidy will shrink to €11,445, as both the eligible costs (€27,250) and the climate speed bonus (12 percent) will decrease. Anyone wishing to install an expensive groundwater heat pump and who cannot demonstrate a low income will therefore experience a subsidy reduction of several thousand euros within just a few months.
From a welfare economics perspective, the German government is implementing a problematic blurring of functions with this reform. Subsidies for climate-friendly heating technologies are allocation policy instruments: they are intended to internalize a positive externality and incentivize the market to adopt the socially desired technology more quickly than the uninfluenced price mechanism would. Income-blind subsidies, consistently aligned with the CO2 reduction effect of the subsidized investment, would be the most efficient instrument for this purpose. By primarily linking heating subsidies to income limits and family status, the coalition is transforming a climate policy instrument into a social welfare transfer program. This shift may be justifiable from a social policy perspective, but economically it makes the subsidy structure unpredictable for the majority of investors and exponentially increases administrative costs.
The fundamental problem with the stop-and-go policy regarding heating subsidies lies in its devastating signaling effect on the entire value chain. Heat pump installers, wholesalers, and manufacturers were still in the process of stabilizing their capacities after the last subsidy surge in 2024. Another application freeze, coupled with sweeping changes to the subsidy system, is leading to a wave of order postponements and planning cancellations. Economies of scale in production, which would be necessary to further reduce the unit costs of heat pumps and make the technology affordable for broader segments of the population, are being permanently thwarted by these fluctuations in demand. Yet it is precisely these cost reduction pathways that could, in the long run, reduce the need for government subsidies. With its inconsistent subsidy policy, the federal government is sawing off the branch it's sitting on.
Added to this are the fiscal reasons behind the reform, which are politically uncomfortable but must be addressed openly: The cuts to heating subsidies are largely motivated by budgetary considerations. The Climate and Transformation Fund (KTF), which finances federal subsidies for energy-efficient buildings, is under immense pressure to consolidate. However, if climate protection investments are, under the guise of considerations of fairness, in reality primarily restricted by budgetary constraints, energy policy loses its credibility as a reliable long-term regulatory framework.
From the first quarter of 2027, a value-added bonus motivated by European policy is also planned: For heat pumps produced outside the EU, the basic subsidy is to be reduced to 15 percent, while for devices manufactured in the EU, a bonus of 15 percent will be added to the basic subsidy. This protectionist element adds another dimension of industrial policy control to the already complex subsidy structure. While this follows understandable motives of strategic industrial sovereignty, it simultaneously makes the subsidy structure even more opaque and could create new incentives for suboptimal technology choices, insofar as cheaper devices of non-European origin no longer represent the most economically advantageous overall solution for individuals due to this reduction.
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From law to deceptive packaging: How the Federal Network Agency is watering down energy sharing
Electricity sharing as a Potemkin village: Energy sharing between legal promise and regulatory emptiness
No current issue in German energy policy illustrates the gap between political ambition and regulatory reality as sharply as energy sharing. The vision is compelling: households and small businesses with rooftop photovoltaic systems should be able to share their surplus electricity with neighbors and other members of local energy communities without bureaucratic hurdles. Europe has proven in Austria and Italy that this model works in practice. In Austria, where several thousand local and regional energy communities are now active, smart meter coverage is around 95 percent, and a central data exchange platform (EDA platform) enables standardized billing. In Germany, however, according to current industry estimates, only four percent of all metering points are equipped with a smart metering system – a structural deficit that has cast considerable doubt on the entire concept of the German energy-sharing approach from the outset.
Since June 1, 2026, energy sharing has been legally possible in Germany based on Section 42c of the Energy Industry Act (EnWG). The law obligates distribution network operators to enable the supply of electricity from producers to consumers within their network area; from June 2028, this is also intended to be possible across network areas. The expectations of citizen energy associations and innovative market players were correspondingly high. However, just a few weeks after the regulation came into force, Chamber 6 of the Federal Network Agency caused considerable confusion with a statement that, in practical terms, amounts to a regulatory admission of failure: The agency declared that the so-called service model – that is, a supplier model that already existed before the statutory energy sharing regulation, in which a third-party service provider acts as an intermediary between producer and consumer – fully meets the requirements of Section 42c EnWG and therefore no further implementation requirements exist for network operators.
The legal and economic explosiveness of this statement lies in its implication. The Citizens' Energy Alliance formulated it unequivocally: If the Federal Network Agency reduces the statutory right of participation to a classic supply model, it will leave citizen energy communities and committed citizens out in the cold. The outrage stems from a concrete contradiction in the legal text: Section 42c of the German Energy Industry Act (EnWG) explicitly provides the consumer with the right to conclude a supply contract of their choice with a supplier of their choice for supplementary electricity procurement. The service model preferred by the Federal Network Agency, however, forces the consumer to use a direct marketer who is also the supplier of residual electricity – which directly contradicts the law's freedom of supplier choice. The Federal Network Agency itself has not responded to the corresponding inquiry as to how these contradictions are to be resolved.
The regulatory authority argues that coordinating electricity supply and consumption by network operators would impose excessive burdens on them and also jeopardize the principles of balancing group management. While this argument is technically sound, it essentially makes a political point: With Section 42c of the German Energy Industry Act (EnWG), the legislator created a legal entitlement that the regulatory authority now deems technically impractical within the prescribed procedure and is diverting to a known substitute. From the perspective of transaction cost economics, this finding is crucial: A market only emerges when the transaction costs for metering, contract design, billing, and settlement are below the economic value of the shared resource. When the authority itself acknowledges that the legally mandated coordination model would require significant additional complexity and extensive IT adjustments for network operators, it is essentially describing precisely this: a market whose infrastructure costs exceed its economic benefits.
The real failure is institutional. For years, Germany failed to implement the EU directives on energy sharing because the federal government at the time consistently referred to the service model as a sufficient compliance option. When the pressure to implement the directives finally became too great, a law was enacted that formally fulfilled the European legal requirements but failed to create the necessary infrastructure for genuine operationalization – smart meter rollout, standardized market communication, and a central billing platform. Arwed Colell, Managing Director of the energy market specialist Decarbon1ze, succinctly summarizes the structural failure: Berlin's position has always been that the service model renders the implementation of the EU directives superfluous. The result, now solidified by the Federal Network Agency's ruling, is that energy sharing is de facto reduced to a supplier model that was already possible before the introduction of Section 42c of the German Energy Industry Act (EnWG) – the entire legislative effort has essentially changed nothing.
Looking at Austria further sharpens the diagnosis: There, plant operators sell their electricity within a community to their neighbors for around 7 cents per kilowatt-hour – instead of the usual 3 cents for centralized direct marketing. This additional revenue of 4 cents creates a genuine economic incentive that simply doesn't exist in Germany because there are no exemptions from grid fees, no tax breaks, and no comparable platform infrastructure. Luca Morandotti from the Energy Economics Research Center succinctly summarizes the result: Without financial incentives, energy sharing remains a hobby project for a few private individuals.
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Institutional erosion as the main problem: Why trust, not technology, is the bottleneck of the energy transition
Looking at the four developments described in their entirety, a pattern emerges that transcends the individual problems of each law or regulation. The core of the problem is institutional: there is a lack of a stable, predictable, and consistent regulatory framework that provides private actors—households, small and medium-sized enterprises, investment funds—with reliable long-term calculation bases. Energy investments typically have amortization periods of ten to thirty years. A heat pump installed today must still be economically viable in 2050. A gas-fired power plant that receives capacity payments under the Electricity Supply Act (StromKG) from 2031 onward must be convertible to hydrogen by 2045 and subsequently operate in a climate-neutral manner. Energy-sharing communities investing today must be able to trust that the regulatory authority will actually grant them the legally guaranteed rights.
In all these dimensions, German energy policy lost credibility in the summer of 2026. Heat pump subsidies were fundamentally altered for the third time in just a few years, this time coupled with a strict application freeze. According to prominent constitutional lawyers, the German Energy Modernization Act (GModG) is treading on shaky ground and explicitly contains open-ended regulations for the period after 2045. The German Electricity Supply Act (StromKG) is still awaiting European state aid approval and thus its actual legal certainty. Energy sharing, through an official directive, has been reduced from its legally promised form back to the previous supplier model.
Regulatory theory and empirical industrial economics are unequivocal on this point: companies and individuals react to regulatory uncertainty with increased risk premiums, which manifest themselves in practice as investment surcharges or a reluctance to invest. Anyone who, given the described instability, calculates the economic viability of a heat pump, a photovoltaic system, or an energy-sharing community based on the currently applicable subsidy conditions is acting rationally—and yet still risks being wrong. This uncertainty is not an unavoidable side effect of ambitious transformation policies. It is a product of legislative practice that relies too heavily on short-term political compromises and too little on long-term institutional reliability.
The way out of this structural dilemma does not lie in even more detailed funding programs or even more complicated tendering rules. It lies in a paradigm shift towards simpler, technology-neutral instruments with long notice periods. A reliably and predictably rising CO2 price in the European emissions trading system and in the national CO2 levy, supplemented by income-independent, flat-rate funding principles for renewable heating technologies with a clearly defined, multi-year reduction path, would send the market the signal it needs. In addition, massive government investment in the grid infrastructure is required – especially the rollout of smart meters – as well as a national digitalization platform for the energy market, without which neither energy sharing nor dynamic electricity tariffs nor flexible load management will be possible nationwide.
In 2026, Germany will have an average household electricity price of around 37.2 cents per kilowatt-hour – one of the highest in the European Union. At the same time, the building sector is consistently failing to meet its climate targets. Every further round of regulatory instability, every new funding freeze, and every new official reinterpretation of legal rights makes Germany a less attractive location for climate technology investments and drives up the societal costs of the transformation. Efficiency in energy policy does not mean acceleration at any cost, but rather the ability to generate maximum private investment with minimal government expenditure. Measured against this standard, German energy policy will require significant optimization by summer 2026.
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