Background

With the Clean Industrial Deal and the planned Industrial Decarbonisation Bank, the EU is pursuing a dual strategy: ensuring competitiveness while reducing industrial emissions. Following successful auctions for renewable hydrogen, the principle of competitive allocation of subsidies is now being extended to a field that is essential for the energy transition – industrial process heat.

The Innovation Fund, financed by revenues from the EU Emissions Trading System (EU ETS), is the key instrument for this. With a volume of more than 40 billion euros, it is one of the world’s largest funding programmes for innovative climate protection technologies. Auctions are an important allocation procedure in this context: they reduce funding costs through competition in funding applications and make the additional costs of climate-neutral production empirically visible. The funded projects help to establish markets for climate-friendly technologies.

The aim of the new heat auction is to increase the share of climate-friendly process heat. Currently, around 75 per cent of the process heat required for all raw materials, such as cement, steel and aluminium but also for paper, glass and food, still comes from fossil fuels in the EU, while electricity accounts for only 4 per cent. Scientific findings show that the direct electrification of process heat should begin before 2030 to achieve the EU’s goal of climate neutrality in 2050 in a cost-efficient way.

What is planned?

The new call for proposals will start as a pilot auction on 3 December 2025 and is aimed at companies from all industrial sectors. With this new instrument, the EU Innovation Fund is promoting investment in and the operation of technologies for the electrification of process heat, such as industrial heat pumps, direct and indirect resistance heating, inductive and dielectric processes, and plasma technologies. Direct renewable heat from solar thermal and geothermal energy, as well as combinations of these technologies, are also eligible for funding.

Technically, many solutions for the electrification of process heat are already ready for use, but reality shows that fossil fuel-based systems often remain the basis for investment because they appear cheaper in the short term. This is where the auction comes in, with the funding provided intended to close existing cost gaps. It is particularly interesting that while there is still a considerable need to fund high-temperature processes, steam generation with integrated heat pumps is already very close to being economically viable. Industrial heat pumps are already competitive in most EU Member States for low temperature ranges.

In order to address the different economic viability gaps and the heterogeneous cost structure of the various technologies, the new funding programme provides three so-called “auction baskets”:

1. Medium temperature range between 100 and 400°C for plants with a thermal capacity between 3 MW and 5 MW
2. Medium temperature range between 100 and 400°C for plants with a thermal capacity of more than 5 MW
3. High temperature range above 400°C

A total of one billion euros in funding from the Innovation Fund will be made available across the three baskets for the pilot auction for the electrification of process heat.

What is the basis for the auction design?

The scientific basis for this differentiation of temperature ranges also stems from work carried out by Fraunhofer ISI, which has been investigating the role of industrial process heat electrification for many years. In several studies, such as the Fraunhofer ISI Policy Brief and work for Agora Industry, we analysed the technological potential and economic conditions of various technologies in different industrial sectors.

These findings have been incorporated into the consultations and the final terms and conditions of the tender. They are a good example of how research and policy-making can go hand in hand.

Electrification of steam generation

The medium temperature range is primarily aimed at steam generation in industries such as chemicals, paper, food, textiles, and pharmaceuticals. Here, our analyses show that industrial heat pumps offer particularly efficient decarbonisation solutions, especially when they use waste heat or ambient heat. The auction design deliberately imposes only a few restrictions on the heat source; large industrial heat pumps can access various heat sources – from exhaust air and cooling water to geothermal energy or surface water. 

High-temperature range above 400°C

The second funding strand is aimed at high-temperature processes above 400°C – particularly in the mineral and metal industries, where furnaces often reach temperatures exceeding 1,000°C. Electrical technologies such as resistance heating or induction are already market-ready here, but have hardly been used to date due to high cost differences compared to fossil fuels. In addition, innovative approaches such as plasma or shock wave heating are gaining in importance, these enable particularly high temperatures and are increasingly reaching market maturity.

Our modelling shows that the ramp-up of electrified high-temperature technologies must begin now. This is the only way to achieve investment security for the plants, given their long service lives of over 25 years.

The electrification of such high-temperature processes not only reduces the use of fossil fuels, but also increases energy efficiency, as no exhaust gases are produced and almost all of the electrical energy is converted into heat. To obtain funding for high-temperature technologies, it is sufficient to provide evidence of the amount of electricity used. This is recognised 1:1 as heat generated, a pragmatic approach that acknowledges the efficiency advantage of electrical processes.

The positive climate impact is convincing

Climate impact is another clear argument in favour of early investment. Although electrified processes in individual Member States may still cause higher indirect emissions in the short term than the direct use of natural gas, the emission factor of electricity is decreasing steadily as renewable energies continue to expand.

To ensure that electrification also benefits the overall system, the auction design provides targeted incentives: The annual eligible heat volume is limited to 70 per cent of the plant’s full capacity over one year. This limit does not apply to projects that integrate heat pumps or direct renewable heat sources or to those that integrate energy storage and are therefore flexible in their electricity demand. Alternatively, flexible process management can increase the proportion of hours eligible for funding to 80 per cent. These approaches reward flexibility and provide an incentive to reduce electricity consumption during particularly emission-intensive or expensive hours.

What happens next?

The EU Commission is providing one billion euros for the auction to promote the most efficient projects across the EU. In addition, Member States of the European Economic Area can provide their own funds for projects in their own countries that have not been awarded contracts under the EU-wide scheme. Through the concept of “Auctions-as-a-Service” (AaaS), they can make use of the existing EU auction platform – an approach that has already proven itself in hydrogen auctions.

The model combines European coordination with national flexibility. The Commission ensures uniform procedures and transparency, while Member States can use their own funding with minimal administrative effort in accordance with state aid law. This creates a harmonised funding design that reduces administrative burdens and facilitates the national expansion of industrial funding.

In addition, the process heat auction serves as a blueprint for the future Industrial Decarbonisation Bank, which is currently being developed by the European Commission. With a total funding volume of 100 billion euros, this institution is intended to support industrial change in Europe with additional policy instruments. Fraunhofer ISI is leading the design of the Industrial Decarbonisation Bank in a consortium with Guidehouse, BBH and ICF. In this way, we are actively contributing to laying the foundations for industry that is competitive and climate-neutral in the long term.