Industrial heat: IF26 and the risk after subsidies

A factory needs steam tomorrow morning. It can keep burning gas, install an electric boiler or, where the required temperature and available heat sources allow, invest in a heat pump. That decision commits the business to years of production. It involves an energy bill, a grid connection and equipment that must be paid for long before the first product made with the new heat is sold.

Europe is offering to add a new revenue stream to that calculation. On 24 September 2026, the European Commission published the final design for its second auction supporting the decarbonisation of industrial process heat, the IF26 Heat Auction. The planned budget is €1 billion, with applications expected to open in early December. Successful projects can receive a premium for five years after entering operation. As of 30 September, the binding call documents have yet to be published (terms, p. 5). Commission announcement, 24 September, updated 30 September 2026.

Follow that payment into the boiler house and the economics become clearer. A subsidy can make electricity competitive in the early years, support a financing agreement and trigger an equipment order. The factory also needs a plan for what follows. In the sixth operating year, the energy bill still arrives.

The first auction shows where the work begins

The first round provides a useful starting point. Results published in May 2026 show 85 applications requesting €1.235 billion. After admissibility and eligibility checks, 69 applications remained, requesting about €477 million. The final selection for grant agreement preparation comprised 65 projects requesting €396.5 million, against an available budget of €1 billion. Commission, IF25 results, slides 2–3.

Initial demand for funding therefore exceeded the budget. The amount associated with the selected projects was only 39.7% of it, calculated from the detailed results. Those stages show the distance between an application and a project that can make it through the process. The aggregate figures reveal little about individual reasons for exclusion. They do show where the requested funding fell away.

The Commission also reports industry feedback that limited preparation time constrained the number of proposals submitted. That explanation concerns the initial application count; the reasons for exclusion would require a file-by-file review. IF26 terms, background, p. 3.

Source: Commission, IF25 results, slides 2–3. Common scale from EUR 0 to 1,300 million. These are funding requests at different stages, before signature and payment; selection represents 39.7% of the budget.

The 65 projects were invited to prepare grant agreements. Actual payments, construction and heat production belong to later stages. The Commission explicitly notes that the set of projects proceeding to signature may change. Commission, IF25 page, “Results”.

The 2026 edition targets installations in the European Economic Area and changes the scope. It sets out three funding baskets: €100 million for heat at 80–100°C, €600 million at 100–400°C and €300 million above 400°C. The lowest-temperature basket is restricted to particular technologies and projects with at least 5 MW of thermal capacity; the other two start at 3 MW. Innovative nuclear heat technologies are now included. IF26 terms, sections 1.9 and 2.1.

That opens the competition to a broader set of solutions. Each still has to meet its own temperature, capacity and delivery constraints. Listing a small reactor as an eligible technology leaves the project developer with the practical task of assembling a viable industrial project and obtaining the necessary permits.

From the heat meter to the bank account

The scheme connects two financial circuits. Upstream, proceeds from auctioning European carbon allowances finance the Innovation Fund. Downstream, a heat installation receives support calculated from its production. The allowance market retains its own prices and obligations: covered companies must surrender allowances for their emissions. Commission, how the EU ETS works.

To compare applications, IF26 converts heat into tonnes of CO₂ using a common factor: 0.224 tonnes per MWh of heat. It represents a gas-boiler reference with 90% efficiency, rounded in the auction terms. Applicants enter the subsidy they seek per thermal MWh, which the form converts into a price per tonne. The premium is fixed and carries no indexation. Without a bonus, subsidised heat is limited to 70% of annual full-load hours, or 6,132 hours in a year of 8,760 hours. The example’s 6,000 hours remain below that limit. IF26 terms, sections 1.1–1.8.

Consider an illustrative project, unrelated to any actual applicant. A new unit delivers 10 MW of useful heat at 150°C for 6,000 equivalent full-load hours a year, producing 60,000 thermal MWh. A subsidy request equivalent to €160 per tonne translates into €35.84 per MWh. At that annual output, support would provide €2.15 million a year, subject to selection and compliance.

The payment starts with metered heat and a shared conversion rule. Both output and temperature must be monitored and independently verified. Payments are normally annual; some consortia including an SME may request a six-month schedule. The gap between paying for electricity and receiving the subsidy still needs working capital. IF26 terms, sections 4.4–4.6.

Flexibility changes the order of the bids

Successful bidders receive the premium they requested. This payment at the offered price is called pay-as-bid. For ranking purposes, however, the auction reduces a qualifying project’s bid price by 25% when it meets specified flexibility or technology requirements. That improves its competitive position while leaving the payment at the requested level. IF26 terms, sections 1.10 and 3.3–3.6.

Take two hypothetical projects in the same basket. A requests €160 per tonne without a bonus. B requests €200 and meets the bonus conditions. B ranks at €150, ahead of A, while retaining payment equivalent to €200 per tonne if selected. The mechanism assigns an explicit value to the characteristics the auction seeks to encourage. The ceilings are €400/t for the low- and medium-temperature baskets and €800/t for high-temperature heat, applied after the bonus.

One route to qualification is new storage able to replace 20% of the project’s grid electricity consumption or the process’s heat demand for four hours, becoming active within an hour. Other routes cover heat pumps meeting the required coefficient of performance, direct renewable heat and nuclear heat. Hybrid configurations have additional conditions. IF26 terms, section 1.10 and footnotes 15–16.

Source: IF26 terms, sections 1.10 and 3.3–3.6. Two hypothetical candidates in the same basket. The bonus reduces the ranking price by 25%. Payment retains the original bid, subject to selection and compliance.

Storage separates two schedules: when the factory needs heat and when it buys electricity. In a hypothetical example, a process needs a steady 10 MW of heat. A store containing 8 MWh of usable heat can supply 2 MW for four hours. It must be charged beforehand, with sufficient spare generation capacity and an allowance for real-world losses. This example gives a minimum usable capacity; actual sizing must cover losses and recharging.

That flexibility can also lower energy costs. The value depends on hourly price differences, network charges, losses and the investment needed to provide it. The International Energy Agency examines this interaction in its analysis of hybrid industrial heating, published in December 2025 using 2024 data. IEA analysis, 9 December 2025.

A fixed premium meets two variable bills

Return to the 10 MW unit. To isolate the economics, assume gas costs €40 per fuel MWh, electricity €85 per electrical MWh, and carbon has a value of €70 per tonne. These are hypothetical prices, excluding recoverable VAT. They are not market quotations as of 30 September. The model uses a gas efficiency of 90%, an electric-boiler efficiency of 98%, and direct metering of useful heat. The IEA also uses 98% for electric boilers in its comparisons. IEA, technical assumptions for its 2024 comparison.

Producing one MWh of useful heat with gas then costs €60.16 in fuel and carbon. Electricity costs €86.73 for the same service. Subtracting the €35.84 premium brings its net cost to €50.89, an operating advantage of €9.26 per thermal MWh. Energy and carbon are the only variable cost items compared here.

The example assigns the full carbon cost to gas. A real installation’s free allowances and any adjustments to them can change the cash consequences. IF26 payments and allowance savings need separate modelling: a tonne of reduced emissions does not necessarily translate immediately into one fewer allowance purchase. Commission, allowance allocation and trading under the EU ETS.

Varying the power price reveals the exposure. With everything else held constant, the two variable costs are equal at roughly €94.08 per electrical MWh while support lasts, versus €58.95 after it ends. These are calculated thresholds for this boiler, before capital spending and fixed costs.

A fixed euro payment per unit of output therefore leaves energy-price risk with the project. More expensive power squeezes the margin; cheaper gas makes the existing boiler more competitive. Public funding absorbs part of the initial cost gap. The energy contract and the ability to adjust operations determine how that gap evolves.

Year six belongs in the lender’s model

Add €3 million of upfront investment, a hypothetical total incremental conversion outlay at commissioning. The gas boiler already exists. At 60,000 MWh of useful heat a year, the calculated operating advantage during support amounts to about €556,000 annually, before differences in maintenance, tax and financing.

Five years at that rate yield €2.78 million in cumulative benefit, slightly less than the initial investment even before discounting. Continued electric operation at the same output and unchanged prices would then cost €1.59 million more per year than the gas alternative. The chart deliberately holds those conditions constant over ten years to expose the post-subsidy risk. It is a stress case in which continued operation is imposed on the calculation.

l0g calculation, downloadable annual cash flows. Assumptions: 10 MW, 6,000 h/year, gas EUR 40/fuel MWh, electricity EUR 85/electrical MWh, carbon EUR 70/t, efficiencies of 90% and 98%, premium of EUR 35.84/thermal MWh for five years. Operating difference before investment, maintenance, tax and financing. Constant prices and continued electric operation are imposed, with no fallback strategy.

An operator may have other options: reduce electric running hours, renegotiate supply, add storage or use existing backup capacity where the project arrangement permits it. Such choices would alter the chart. Its purpose is to identify the conditions an investment needs to improve, rather than to project commercially irrational behaviour.

A heat pump can shift the result substantially. With a coefficient of performance, or COP, of 2, it delivers two units of heat for one unit of electricity. At an electricity price of €85/MWh, its energy input alone would cost €42.50 per thermal MWh, before support. The difference comes from recovering heat from outside the system. The project must still pay for the equipment, secure a suitable heat source and achieve the required delivery temperature. The IEA describes this trade-off between lower energy expenditure and higher upfront costs. IEA, technology and cost analysis.

That is an important counterpoint. Some configurations can remain competitive after support because of their efficiency, favourable power supply or flexibility. Temporary aid can accelerate an investment with durable economics. Whether that happens depends on the site, something the subsidy amount alone tells us little about.

Two carbon accounts to keep

The payment rule provides administrative simplicity: all eligible heat is converted using one factor. Reading the climate outcome requires a separate calculation. The subsidised quantity follows the gas reference, while the fuel actually displaced and emissions from electricity generation can differ. The terms explicitly exclude further accounting for indirect emissions in the abatement calculation beyond the flexibility mechanism. IF26 terms, sections 1.1 and 1.10.

At the same heat output and efficiency, operational emissions change with the source of electricity; the financial formula stays the same. Measuring a climate effect requires a defined boundary, a replacement scenario and a view of emissions over time. An annual average electricity mix answers a different question from the generating unit responding to additional demand in a particular hour.

Electricity generation is itself covered by the European carbon market, a point the Commission explicitly invokes (terms, section 1.10). The overall climate effect therefore also depends on the operation of that market and the evolution of the power system. Fraunhofer’s industrial-heat research likewise shows how strongly electrification outcomes depend on efficiency and electricity generation. Fraunhofer ISI, Policy Brief 01/2024, pp. 10–12.

Funding still has to reach the factory

A grant agreement offers conditional revenue. Turning it into equipment requires delivery: IF26 specifies financial close within two and a half years of signing, followed by entry into operation within five years. A completion guarantee covers 6% of the maximum grant. Those commitments place part of the execution risk on the developer and its financial guarantor. IF26 terms, sections 2.3 and 4.0.

The application must also demonstrate a credible path to securing the required grid connection by commissioning (terms, section III). That is an economic constraint in its own right: the IEA identifies connection costs as a substantial and highly site-specific barrier. Available machinery and a prospective subsidy can achieve little until the necessary electrical capacity is accessible. IEA, grid connections and heat costs.

Public support must also fit together. The terms restrict combinations with capital or operating aid, including certain electricity-price relief schemes, while allowing exceptions for other categories. A project model needs the electricity price it can actually obtain after those compatibility checks. IF26 terms, section IV.

The announced billion euros is therefore a starting point for assessing this second auction. The next useful evidence will be signed agreements, completed financing, connected installations and verified heat production. A longer test follows: whether the new boiler houses can keep serving industry after the premium ends.

For a broader view, our analysis of the price of cooling examines physical constraints on installations, while our investigation into carbon credits and neutrality claims discusses the boundaries of carbon accounting.

Sources and documents

Method and limitations

Evidence cutoff: 30 September 2026. Rules refer to IF26 final terms, version 1.0 dated 24 September; the forthcoming call documents will prevail in the event of differences. IF25 figures describe the selection announced in May, without assuming which agreements have since been signed. All plant, comparative-bid and storage examples were constructed for this article and are labelled in the figures.

The economic model compares continued use of an existing gas boiler with electric conversion, providing the same useful heat. It applies the published grant factor of 0.224, separately from the exact quotient 0.202 / 0.90 used for gas-combustion emissions. It excludes differences in maintenance, taxation, financing structure, changes in free allowances, payment-processing delays and residual value. Emissions calculations cover gas combustion and power generation; upstream supply, construction and decommissioning are outside the boundary. Annual scenario cash flows are available as a CSV. Gas cost is (40 + 70 × 0.202) / 0.90; electric cost is 85 / 0.98; the premium is 160 × 0.224. Annual operating cash is the difference in these costs, including the premium for five years, multiplied by 60,000 MWh. The EUR 3 million investment is recorded in year zero.