Awakening the Giant: decarbonizing the Heating Sector in Europe and Beyond
The heating sector is a giant market with huge climate impact potential
Nearly half of Europe’s energy demand (c.a. 11,000TWh) is used for heating. Given that fossil fuels are still supplying nearly 70% of those heating needs, it is a sector with high decarbonization impact potential. Space heating is the largest use, accounting for over half the heating energy consumed. It is followed by the industrial heat with around 30% share, and the remainder used for hot water and other purposes.
The total European residential heating market size is estimated at €43 billion , based on bottom-up assumptions regarding the number of single-family homes in Europe, the annual heating replacement rate and the unit cost of a heat pump-based heating system. The biggest European markets, which collectively account for roughly 80 million gas boilers installed, are the UK, Italy, Germany and France. Were all of these gas boilers to be replaced by heat pumps, the climate impact could reach 156 MtCO2 by 2030, assuming an average annual unit CO2 savings of 2.6 tCO2 per heat pump. This constitutes 7.5% of the EU’s 2030 Climate Target Plan of 55% emissions reduction from 1990 level by 2030.
[Learn more about grid decarbonization: /piclo-raises-series-b/]
On a global level, space heating is responsible for around 4 GtCO2 emissions annually – 10% of total global Greenhouse Gas (GHG) emissions. The most promising decarbonization pathways for heat are highly efficient electrification and direct use of renewables, complemented by green hydrogen and district heating playing a more local role. Heat pumps, which are 3x-5x more efficient than gas boilers, are among the key technologies for the electrification of heat. The International Energy Agency (IEA) estimates that heat pumps could save more than 0.5 GtCO2 emissions by 2030 globally.
Political tailwinds will stimulate heat pumps adoption across the US and Europe
Recently, governments in Europe and the United States have been taking steps to encourage the adoption of heat pumps in households. In the US, the Inflation Reduction Act introduced incentives for heat pumps in the form of tax credits up to $2,000. The European Commission also recently increased its ambition for heat pump deployment to achieve 20 million units installed by 2026 and 60 million units by 2030. There are also incentives on a national level in several member states, for example, reduced sales tax on heat pumps in France to 5.5%, or a policy target in Germany to sell 500,000 heat pumps annually from 2024 and to reach a stock of 6 million heat pumps by 2030[1, 8]. To achieve these goals, only heaters that run on at least 65% renewable energy will be allowed from 2024 in Germany.
FEV’s take: the road ahead
Some common areas of friction that present an innovation opportunity for entrepreneurs to accelerate heat-pump adoption include:
- The consumer’s limited understanding of the technology
- The high upfront equipment cost (€12,000-15,000), and a turnkey cost including installation potentially reach €30,000
- A potential shortage of hardware supply (€2 bn investment in expanding manufacturing capacity planned in Europe by 2026)
- A shortage of installers driven by market fragmentation and inefficiency (low digitization level)
- Slow regulatory progress on introducing effective policies for addressing the large building renovation need in Europe with regarding to insulation, piping, etc.
The hardware is manufactured at scale by established players such as Viessmann, DAIKIN, Bosch, Mitsubishi and Vaillant, among others. On the startup side, the industry players concentrate mostly on the topics of climate-friendly refrigerants, improved heat pump efficiency and digital tools for installers. Some notable startups in the space include:
- Thermondo (DE) – #1 independent residential heating retailer and installer in Germany,
- VoltAir (CZ) – built a platform to connect installers and maintenance businesses focused on sustainable energy solutions with residential customers,
- Dandelion Energy (US) – offers affordable geothermal heating and cooling turnkey solutions in the US from customized design to installation,
- Regli (CH) – with their innovative design provides highly efficient heat pumps, which also use a sustainable refrigerant (propane gas),
- Gradient (US) – provides innovative and highly efficient window-mounted air conditioning systems
At Future Energy Ventures, we are proud of our portfolio companies Thermondo and Tado, two promising startups that are addressing this challenge head-on. Thermondo is the leading independent residential heating retailer and installer in Germany, with heat pumps currently the #1 product in the portfolio. Tado is the leading smart thermostat provider and currently developing products and solutions for heat pump technology, including addressing demand response and accommodating optimized energy tariffs.
[Learn more about disruptive technologies in energy crises: /energy-crisis-an-opening-for-disruptive-technologies]
The decarbonization of heat is a massive market opportunity with high impact potential and, with regulatory tailwinds, we believe that now is the time to invest. Digitization is the solution to the biggest bottleneck – the fragmented and inefficient installation market – but the promising advancements across the sector are bringing us closer to awakening the giant that is the heating sector and its massive potential for decarbonization that will take us a large step closer to reaching climate targets.
 Assumptions: 95m households, 75% built before 1990, 2% heating replacement rate, €30,000 unit cost
 LCPDelta, European E-Heat Map, Assessing the market for electrification of heating and hot water in Europe 2022, 30th December 2022
 https://www.statista.com/statistics/450017/co2-emissions-europe-eurasia/, 1990 EU emissions: 3.75GtCO2
 LCPDelta, The Expansion of the European Heat Pump Production Capacity, Electrification of Heat Service, January 2023