[EN] A Heated Debate in a Heating World: Heat Pumps amid Energy Crisis

Russia’s second invasion of Ukraine settled the economic and political cost of Europe’s dependence on imported fossil fuels. Four years later, the war in Iran has confirmed that this vulnerability is not episodic but structural.

Europe cannot insulate itself through emergency packages alone. What is required is a sustained programme to remove imported fossil fuels from final energy use, with low-carbon electrification as the central pathway. Yet current spending still points in the wrong direction. Our latest estimate that of the €16 billion mobilised in emergency measures, only about €2 billion has supported electrification.

In parallel, price caps tax relief and on fuels and gas have prolonged the very dependence Europe is trying to reduce. The European Commission’s forthcoming Electrification Action Plan, due in mid July 2026, is therefore the opportunity to make that pivot – to treat each geopolitical shock not as a problem to be cushioned, but as the core reason to accelerate the transition. Residential heat pumps sit at the centre of this argument, being able to simultaneously reduce household exposure to gas prices and cut emissions in the buildings sector. But the European heat pump market remains fragile.

In fact, although the EU has met its REPowerEU milestone, the installed base still falls short of the trajectory implied by the Fit for 55, and annual sales continue to move with gas prices rather than resting on stable, policy-driven demand. The report shows that two conditions are decisive if this market is to become durable. The first is the electricity-to-gas price ratio. Heat pumps do not require electricity to be cheaper than gas in absolute terms, but they do require electricity to remain reasonably attractive relative to gas.

Where the ratio is unfavourable (more than 2:1 times), public support must compensate for weak market incentives, creating a fiscal trap in which governments spend more simply to offset distorted price signals. The second condition is policy credibility. Heat pumps are long-term investments, and households, installers and manufacturers need stable rules, predictable subsidies and a clear regulatory direction. Stop-and-go policy design, abrupt changes in grants or repeated reversals of mandates undermine confidence and slow market transformation.

The four countries analysed show that there is no single model for success. Ireland demonstrates the limits of relying mainly on carbon pricing: the tax is politically established, but it has not delivered large-scale heat pump deployment because electricity remains structurally disadvantaged and crisis measures have weakened the relative price signal.

The Netherlands offers the clearest example of direct fiscal rebalancing, having shifted taxation away from electricity and onto gas in a way that improved the economics of heat pumps. Yet its experience also shows that price signals are only effective when backed by stable regulation: the cancellation of the planned hybrid heat pump mandate weakened long-term credibility. Germany illustrates the opposite risk, with ambitious regulation introduced in a context where electricity remained relatively expensive and policy design became politically contested.

France starts from a more favourable electricity mix and a better baseline ratio, but repeated changes to grant schemes and fiscal constraints have weakened the credibility of support. The common lesson is that electrification succeeds only when relative prices, regulation and support instruments altogether are aligned over time. Importantly, the optimal policy sequence differs depending on a country’s starting point. Where the ratio is already favourable, the priority shifts to policy delivery: subsidies that are stable and well designed, light administrative burdens, and an end to the stop-and-go support that has repeatedly shaken confidence.

Germany and the Netherlands show the costs of reversals; France shows the limits of instability even when fundamentals are stronger. Where the electricity-to-gas ratio is still unfavourable, fixing that ratio must come first as regulation alone cannot overcome a price signal pointing in the wrong direction. To do so, the current energy crisis should be treated as a political window to rebalance relative prices in favour of electricity. Governments should not seek to suppress energy prices uniformly as seen in France in 2022.

Instead, crisis support should be designed to protect households while preserving incentives for electrification. That means cushioning electricity more than gas, as Ireland and Germany did in 2022, and using more differentiated support rather than broad, untargeted price caps. Stronger relief on electricity, targeted transfers for gas-dependent households, and temporary reductions in taxes and levies can all be deployed through existing billing systems.

This is not only fiscally more efficient; it is also better aligned with electrification because it protects vulnerable households without erasing the price signals needed to drive heat pump investment. The medium-term challenge is to unlock the scale of investment needed for ambitious and durable electrification policies. The war in Iran has raised oil and gas prices in a way that resembles, though with a different magnitude and volatility, the price signal that the new carbon market for buildings and road transport is expected to create from 2028. The difference is that today’s geopolitical shock generates no public revenue for Member States to reinvest in decarbonisation.

ETS2, by contrast, can turn a carbon price into a financing tool. Frontloading future ETS2 revenues through the European Investment Bank would give Member States the fiscal capacity to move beyond short-term emergency relief and support large-scale, predictable and socially credible transition policies. Under such a mechanism, the EIB would provide loans to Member States, backed by future ETS2 revenues. This would allow governments to finance heat pumps, electricity-tax reductions, building upgrades and targeted household support before ETS2 becomes politically contested.

In this framework, ETS2 would cease to be seen primarily as a political liability and would become a financing engine for Europe’s electrification. The logic is straightforward: preserve the relative price signal now, and use future ETS2 revenues to build the investment architecture that makes the transition durable. Ultimately, electrification should not be treated as a narrow climate policy instrument, but as a core energy security strategy.

The strategic question is therefore not whether to intervene, but how to use intervention to turn emergency response into durable transition: in the short term, by preserving the electricity-to-gas price ratio; in the medium term, by mobilising ETS2 revenues to finance ambitious, scalable, and socially credible electrification policies. Finally, Member States and the European Commission should prepare contingency plans based on three possible scenarios for the Strait of Hormuz: a rapid reopening in July, a disruption lasting until the beginning of the winter heating season, and a prolonged conflict.

These plans should predefine the demand-reduction measures that would apply under each scenario, drawing on existing examples such as Portugal’s rules-based crisis triggers and the Netherlands’ multi-stage oil crisis framework. They should also clarify under what conditions additional exceptional measures could be justified, including temporary flexibility under European fiscal rules.

Such flexibility should remain tightly conditioned: it must be temporary, targeted, proportional to the scale of the shock, and oriented towards electrification and demand reduction rather than blanket fossil- fuel subsidies.