In a policy paper of 21 September 2026, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, “BMWE”) has set out proposals to fundamentally reshape combined heat and power (CHP) funding under the Combined Heat and Power Act (Kraft-Wärme-Kopplungsgesetz, “KWKG”). The proposed changes reflect the evolving role of CHP in the German energy system: While CHP plants currently generate approximately 100 TWh of electricity from 43 GW of installed capacity, installed capacity is expected to fall to around 25 GW by 2045, with CHP plants operating much less frequently and primarily stepping in when wind and solar power generation is insufficient. The BMWE plans to adapt the funding regime to these developments. Funding is to be extended until 2035, paid out at higher rates over a shorter period, tied more closely to flexible operation, and clearly distinguished from the new capacity mechanism under the Electricity Supply Security and Capacity Act (Strom-Versorgungssicherheits- und Kapazitätengesetz, “StromVKG”).
Greater certainty for investors: extension until 2035
Continuing the KWKG is an urgent priority. According to the BMWE, the current legal framework effectively precludes investment in new or modernised plants because plants whose funding is not determined through competitive auctions are eligible for that funding only if they commence continuous operation by the end of 2026 or have been approved or firmly ordered by that date and enter operation within four years. Going forward, commissioning will again be the decisive factor, as was the case before the 2025 revision of the KWKG. Plants whose funding is not determined through competitive auctions, as well as heating networks and heat storage facilities, will be eligible for funding provided they commence continuous operation by the end of 2035. In the auctions for CHP plants and innovative CHP systems (iCHP), an award must be made by the end of 2031. Auctions will continue to be held every six months, with volumes not auctioned after 2025 carried forward to future auction rounds. The BMWE opposes an indefinite extension of the KWKG, citing the continually evolving framework conditions within the German energy system. The KWKG is instead to be evaluated on a regular basis, particularly in conjunction with the StromVKG and the future capacity market. Projects that will not come on stream until after 2035 therefore currently have no prospect of receiving funding under the KWKG.
Higher funding rates over a shorter funding period
The most significant economic change is the shortening (“compression”) of the funding period. Whereas new plants currently receive a premium for a total of 30,000 full-load hours, this is to be reduced to 20,000 hours, but the funding rates are to be increased by 50%. This means that the overall funding per kilowatt remains unchanged (approximately EUR 1,170 for plants over 50 MW). The advantage is that the funding will arrive sooner: The BMWE estimates that paying out the same amount over a shorter period will increase its present value by well over 10%. This will – the BMWE argues – effectively amount to an increase in funding rates and reduce the refinancing period for operators and investors.
At the same time, the number of hours funded per year will continue to drop after 2030, falling by 200 hours every two years until reaching 1,500 hours in 2040. This will also apply to plants taking part in auctions. By limiting the number of funded hours, the reform seeks to incentivise operators to feed electricity into the grid during periods with the highest electricity prices.
More efficient use of funds
Small plants with a capacity of up to 50 kW currently receive 16 ct/kWh for electricity fed into the grid, more than four times the amount paid to large plants over 50 MW, which receive 3.9 ct/kWh. In the BMWE’s view, the benefits these plants bring to the electricity system and security of supply do not justify these higher costs.
The funding for plants with a capacity of up to 500 kW is accordingly to be adjusted in three stages:
- When the proposed amendments come into force, the doubling of the funding rates for plants up to 50 kW will cease to apply (section 7(3a) KWKG).
- From 1 January 2028, a uniform rate of 7.5 ct/kWh will apply to capacity tranches of less than 500 kW.
- From 1 January 2029, new plants with a capacity of less than 25 kW will no longer be eligible for funding, reflecting the approach envisaged under the planned reform of the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, “EEG”).
- Furthermore, plants with a capacity of up to 100 kW will no longer receive a premium for electricity not fed into the public grid.
The funding regime for modernisation measures is also being restructured, with the level of funding depending on how the investment compares to the cost of building a new plant. The existing 10% “minor” modernisation threshold will cease to apply, with eligibility in future requiring investments of at least 30% of the cost of a hypothetical new plant. Depending on the level of investment (at least 30, 40 or 50%), a premium will be awarded for 6,000, 8,000 or 10,000 full-load hours, respectively. Another new feature is the introduction of a performance review mechanism, requiring both electrical efficiency and overall efficiency to improve by at least three percentage points compared to the existing plant.
Making the electricity system more flexible
According to the latest evaluation, the benefits of CHP for the electricity system as a whole do not arise from the combined generation of heat and power in itself, but only when CHP plants operate flexibly in response to wind and solar power generation without displacing renewable electricity. The policy paper sets out several measures to achieve this:
- Raising the electricity price threshold: In future, funding will only be available once the wholesale electricity price reaches 3 ct/kWh (EUR 30/MWh), instead of 0 ct/kWh as at present. However, as wholesale electricity prices have exceeded this threshold during 85% of all hours since 2024, the BMWE believes that operators will still have ample opportunity to claim the full amount of funding available. At prices between 0 and 3 ct/kWh, no premium will be paid, but the corresponding hours will not be forfeited. As is already the case, hours eligible for funding are forfeited without compensation where prices are negative.
- Strengthening direct marketing: Operators of plants with a capacity of up to 100 kW are currently permitted to sell their electricity to the grid operator at any time at the statutory “usual price” (”kaufmännische Abnahme”), insulating them from market price signals. This option will initially remain available for as long as the plant receives funding. However, the grid operator will be required to sell the electricity rather than use it to meet its own electricity needs. From 1 January 2029, operators of new plants will only be able to consume the electricity themselves, market it directly or supply it to the grid operator free of charge (i.e. without receiving any payment other than the CHP premium, where applicable), in line with the approach taken under the EEG.
- Negative redispatch: It will also become easier to reduce the output of CHP plants to alleviate grid congestion. Until now, operators have frequently invoked their heat supply obligations to avoid such reductions. In future, their ability to declare their plants unavailable on these grounds will be restricted.
- Finally, the bonus for power-to-heat plants under section 7b KWKG, which was previously subject to state aid approval, will be abolished. Instead, the previously applicable provision in section 13(6a) of the Energy Industry Act (Energiewirtschaftsgesetz, “EnWG”) will be reinstated. Under this provision, transmission system operators select sites that can help alleviate grid congestion cost-effectively and efficiently and enter into contractual arrangements governing the plants’ participation in redispatch.
Relationship with the StromVKG
The StromVKG, which entered into force in July 2026, and the comprehensive capacity market planned from 2032 provide a second funding scheme that is generally also open to CHP projects (see our article). However, double funding is not permitted: operators must choose between the two schemes. Companies should carefully assess which option makes the most economic sense for their particular project.
The KWKG provides funding for electricity generation by paying a per-kWh premium; the higher premium payable over fewer eligible full-load hours provides a present-value advantage. The StromVKG instead provides payments for making dispatchable capacity available, with contracts awarded through competitive auctions.
The KWKG also benefits from a procedural advantage under EU state aid law: on 9 July 2026, the European Court of Justice (ECJ) ruled that funding under the 2020 version of the KWKG does not constitute state aid. The BMWE considers this ruling equally applicable to the current KWKG and therefore does not plan to seek European Commission approval of the proposed amendments. This should allow the reforms to be implemented promptly without having to undergo the EU state aid approval process. By contrast, the capacity mechanism under the StromVKG required approval from the European Commission, which was granted on 2 September 2026.
Impact on business models and categories of plant
The revised KWKG will affect companies in various ways, depending on their business model and the size of the plants they operate.
- Large-scale plants over 50 MW – and all projects that newly qualify for funding – will benefit primarily from the compression of support payments, which the BMWE calculates will increase the funding’s present value.
- For plants between 500 kW and 50 MW, for which funding is determined by auction, the main changes will be procedural:
- The deadline for realising projects awarded funding will be extended by six months to 54 months. Penalties will only apply from the 55th month, and annual progress reports will no longer be required.
- Of greater economic importance is that the annual number of eligible full-load hours will also be reduced for the first time in the auction segment, from 3,500 currently to 1,500 in 2040. Stricter conditions placed on modernisation will also apply.
- Small plants with a capacity below 500 kW will be particularly heavily impacted. Their economic environment will change significantly as funding will be reduced, new plants below 25 kW will cease to be eligible, and the ”usual price” mechanism will gradually expire for plants with a capacity of up to 100 kW. Operators and project developers should review the economic viability of planned projects at an early stage.
- By contrast, funding for heating networks will be increased: the funding cap for the construction and expansion of these networks will increase from EUR 50 million to EUR 100 million, thereby making larger projects eligible for funding, while the cap on the aggregate amount of premium payments for heating and cooling networks and storage facilities will rise from EUR 150 million to EUR 400 million.
- In addition, a simplified anti-cumulation regime will apply to plants of all sizes, meaning that plant-related funding may not be combined with other federal subsidies covering investment costs. As a further measure, late applications will result in a reduction in the amount of funding. As under section 17 StromVKG, CHP plants primarily operated using natural gas must be “H₂-ready”, i.e. constructed so that they can later be fully converted to hydrogen operation. Operators will be required to provide a corresponding conversion plan. Independently of the proposed revision of the KWKG, auctions for the use of hydrogen in power plants are also to be introduced from 2027 onwards, in which CHP plants will likewise be eligible to participate.
Outlook: Next steps in the legislative process
The proposed timeline is ambitious. A government draft of the revised KWKG could be adopted by the Federal Cabinet this autumn following initial consultation with industry associations, although no ministerial draft had been released as of 14 October 2026. After Cabinet approval, the proposal will be considered by both the Bundesrat and the Bundestag, with the aim of bringing the revised act into force by the end of the first quarter of 2027.
Under the current law, new or modernised plants whose funding is not determined by auction only qualify for funding if they commence continuous operation by the end of 2026 or if they have been approved or a definitive order placed for them by that date and are commissioned within four years. This creates a potential gap for plants ordered after year-end but before the new legislation takes effect, as eligibility for funding during that period is not assured. The policy paper remains silent on how this issue will be resolved, although the introduction of a cut-off date in the new act would be one possible approach. Businesses affected by this should keep a close watch on the ongoing legislative process.
The policy paper does not currently provide for any transitional arrangements for projects already in the planning or development phase, and it remains unclear whether this will be addressed in the draft bill. Such arrangements would be particularly important for projects affected by the reduction in funding for small plants, the withdrawal of funding for electricity not fed into the grid from plants with a capacity of up to 100 kW, and the tighter modernisation criteria. The German Association of Energy and Water Industries (Bundesverband der Energie- und Wasserwirtschaft, “BDEW”) has largely welcomed the proposals and notes that the compression of the funding period reflects one of its policy recommendations. It argues, however, that given the planned coal phase-out and hydrogen ramp-up, the funding regime should remain available until 2038, with the final auctions held by the end of 2035, and recommends adjusting funding rates in line with cost developments. The German Association of Local Public Utilities (Verband kommunaler Unternehmen, “VKU”) likewise advocates maintaining the scheme until at least 2038.
As the policy paper is not yet a draft bill, further changes remain possible, although the tight legislative schedule leaves little time for stakeholder feedback. Affected companies should therefore start drafting their comments now to ensure that their concerns are raised – either directly or via their trade associations – especially during the parliamentary process.
Forward
