Germany is at an important inflection point in its energy transition. As one era of its energy history draws to a close, another is coming clearly into view – the move away from nuclear, coal and Russian natural gas contrasted by the transition towards renewables, low-emissions hydrogen, heat pumps and electric vehicles (EVs). While the world has been buffeted by geopolitical and geoeconomic challenges in recent years, Germany has worked hard to accelerate its clean energy transition. This report seeks to provide Germany with timely advice on how it can progress towards its energy and climate goals, including in three key focus areas: 1) optimising electricity system operation; 2) decarbonising heating in buildings; and 3) expanding the role of hydrogen in the energy system. It emphasises the need for long-term policy stability, targeted demand creation, infrastructure development, integrated planning and streamlined permitting to successfully advance Germany’s energy transition.

Germany’s transition is crucial not only to meet its climate goals, but also for its energy security and economic competitiveness. It is targeting a 65% reduction in greenhouse gas (GHG) emissions by 2030 (from 1990 levels) and climate neutrality by 2045, with the long-standing Energiewende strategy guiding the evolution of its energy system. While this has supported a surge in renewables-based electricity generation, which will need to both continue and grow, more work lies ahead to decarbonise end-use sectors, such as transport, industry and buildings. Existing strategies and supportive policy measures in these sectors will need to be matched by a strong focus on effective, cost-efficient implementation. Given that German consumers pay among the highest electricity prices in Europe, policy developments will need to also be seen through an affordability and competitiveness lens, including by ensuring that the distributional impacts are well understood and that proactive
measures are taken to manage the costs of transition measures. To ensure public support for the transition, the government should also clearly communicate costs, benefits and timelines.

Germany should prioritise actions that optimise the efficiency and resilience of its growing electricity system, such as smart meters, grids, storage and locational pricing. As it seeks to achieve 80% renewable energy in power consumption by 2030, faster smart meter rollout can help unlock the flexibility latent within “behind-the-meter” assets (solar panels, heat pumps, EVs). Actions could also be taken to facilitate distribution grid upgrades, enable access to and use of smart meter data, and potentially allow smart meters to control distributed solar photovoltaic (PV) supply. Germany should also jump-start an expansion of large-scale storage in optimal locations, including by fast tracking the implementation of measures in its electricity storage strategy and accelerating grid connections for projects. Routes for action could include the expansion of capacity in existing programmes (frequency response and services markets, grid booster initiative, etc.) and the adoption of new, utility-scale storage tenders targeting optimal locations. Such efforts should be complemented by clearer locational signals to improve system operation and reduce the need for new grids, as the efficient use of existing grid infrastructure is crucial. Supportive actions could include ensuring that new grid connections are in optimal grid locations (now and in the future), and that locational signals are part of future support rounds for generation, storage and electrolysers.

The transport sector must shift into high gear if it is to help drive Germany’s energy and economic transition. Transport is the largest source of energy end-use emissions and has registered only modest reductions in recent years. A broad approach is required that incorporates all clean fuels and technologies, including greater use of public transport. Long-term investments to upgrade public transport infrastructure can support modal shifts away from road transport (which accounts for 95% of total transport emissions). There is also considerable potential to adopt policies that boost EV uptake. Options include a bonus-malus tax structure that incentivises low-emissions vehicle purchases, specific measures targeting leased and company cars (the largest share in the German market), faster deployment of charging infrastructure, ensuring even treatment of compliance options in Germany’s GHG quota policy, and improving co-ordination across relevant ministries. Germany’s incredible transport heritage and manufacturing base has the potential to be a distinguishing asset, but this hinges on well-designed transition measures that support its competitiveness in the clean energy economy.

A clear vision for transitioning Germany’s building stock must be coupled with consistent communication and dependable policy signals. The Building Energy Act provides a clear, long-term legal framework that sets targets and timelines for renewables-based heating systems. This must be coupled with equally clear policy signals that electricity (i.e. decentralised heat pumps) and decarbonised district heating paired with increased energy efficiency will be the primary options to decarbonise heating in buildings. There should be support for energy efficiency upgrades and the deployment of heat pumps, as well as backing the role of energy advisors to assist homeowners. The Heat Planning Act is also a significant positive step, requiring municipalities to present plans to make local heating infrastructure climate-neutral. It is important to support the timely development of these plans, ensuring that all levels of government have the resources needed to implement them. There may also be positive opportunities to foster regional co-ordination, align heat planning with other energy system planning, and use the plans as the basis for large-scale technology procurement. Proactive, fact-based communication to consumers should explain the need to accelerate the decarbonisation of buildings, that energy efficiency and electrification is the most viable solution pathway, the business case for such investments, and the support measures available to facilitate adoption.

Germany has high ambitions for low-emissions hydrogen to transform the industrial heart of its economy. A comprehensive hydrogen strategy exists, prioritising hydrogen use in industries where direct electrification is challenging. Ambitious supply and demand goals are accompanied by plans for extensive domestic infrastructure buildout and international co-operation to help grow a global green hydrogen economy. Despite this, final investment decisions are lagging due to concerns over supply, affordability and the lack of off-taker commitments. There is a need to stimulate low-emissions hydrogen demand, using levers such as public procurement, targeted carbon contracts for difference and green materials standards, among others. An integrated planning approach for hydrogen, natural gas and electricity infrastructure can maximise synergies and de-risk investments, such as by realising opportunities to repurpose gas pipelines. Toward this end, the 2024 System Development Strategy aligns system planning across the electricity, natural gas and hydrogen networks.

Overall, Germany’s energy transition can present an immense opportunity if the right policy choices are made. As a technological and industrial leader, Germany is well-placed to realise these opportunities if it can optimise the operation of its energy system; increase citizen acceptance for the energy transition (including through clear, regular communications); and ensure a steady, long-term policy and regulatory environment that help accelerate investments. Equally important will be due consideration to energy costs, especially electricity, as electrification becomes a centrepiece of the energy transition. Looking forward, regular reviews of progress and corrective actions will be important to help Germany meet its goals.