Germany’s hydronic heat pump market has seen a couple of excellent years. Following growth rates of 18% in both 2016 and 2017 the market grew by another 8% in 2018, an increase of 51% over 2015. But is that party coming to an end? Many indicators are pointing in this direction.
Recap: A market both driven and held back by subsidies & regulations
Two factors drove the German heat pump market in the last three years: a change to the building regulations taking effect in 2016 as well as a change in subsidies in 2015. This combination created the perfect storm for heat pumps. But the success may be built on thin ice, as subsidy applications equivalent to 50-80% of all installations were made in 2017.
But subsidies are also part of what is keeping the market from realising its full potential. Payments for renewable electricity subsidies alone account for 20-30% of the electricity costs. At the same time oil and gas enjoy a much lower burden of taxes and levies. This makes electricity 4-5x more expensive than fossil fuels. As a result, heat pumps are struggling to compete with boilers in existing buildings.
51% growth sounds great, so why so gloomy? There are 3 reasons...
First of all, Germany's market has now internalised the above-mentioned changes to the building regulations and subsidies. They have become part of the status quo. Without new impulses from other areas the market won't move away from this new equilibrium.
We have seen this before in the French heat pump market. The market grew by 60% in three years, as it adapted to a change in building regulations in 2013. But after this phase, the growth almost ground to a complete halt. New drivers are now pushing the market again, but without them the growth would have stalled. And in Germany, these are currently not on the horizon.
Secondly, the German market is also very dependent on the new build segment. And here in particular on the market for detached and semi-detached buildings. Alas, permit applications for this segment have peaked in 2016 and are since in a slight decline. The government is trying to push the segment with the so-called Baukindergeld. The measure has received strong interest from consumers, but if there will be a real effect on new builds is not yet clear. So far the money has mainly been spent for buying existing homes, not adding to the stagnating new build market. What is clear though is that for 2019 and into 2020 the size of the new build market will not drive heat pump sales.
Finally, the regulatory and economic environment will remain unhelpful. The coalition is opposing any changes to the new building regulations that are under discussion which would be more demand than what we have today. While there are some changes that may give heat pumps a better standing by allowing for lower insulation levels, this is unlikely to be a strong driver. At the same time, the Government also seems to be unable to tackle the real problem in the market - the energy prices. Demands for a restructuring of the energy price levels seem to be falling on deaf ears with the Government. This makes any positive impulse from the existing building segment difficult to envisage.
Summary – Is standing still in the next two years a step forward?
In summary, the fundamental economic drivers in Germany remain stacked against heat pumps. At the same time the regulatory drivers are losing force and new ones aren't on the horizon. Coupled with a stagnant new build market, this doesn't make for a positive outlook for the next couple of years (and beyond).
In my next blog I will therefore look in more detail into how the market could be set up for more sustainable growth. I will then conclude with a piece on how manufacturers can keep growing in this environment.