Heat pumps in Italy: subsidies exhausted, market collapses

In Italy, there was an enormous increase in heat pumps and house renovations. However, this was an artificially generated investment boom with dubious benefits for climate protection. Now the subsidies in Rome have been used up and the market is collapsing. This should serve as a lesson to German heating politicians (Focus: 08.06.23).

Italy’s construction boom and tax benefits: The ‘Superbonus 110 per cent’ and its effects

In 2020, the Italian government under the left-wing Prime Minister Giuseppe Conte had adopted the “Superbonus 110 percent”, a plan to boost construction activity and promote more efficient heating in homes across the country.

Generous subsidies made low-cost heat pumps possible in Italy. Now the subsidies have been used up and the market is dead
Generous subsidies made low-cost heat pumps possible in Italy. Now the subsidies have been used up and the market is dead

The Italian government has created generous tax breaks and subsidies for investing in the modernisation of buildings. Households had the option of either deducting the renovation costs from their tax return over a five-year period or passing the amount directly to the contractor and immediately receiving a discount on their bill.

Heat pump boom in Italy: Generous subsidies enabled cost-effective modernisation of residential buildings.

The Italian government made it possible for financially weak property owners to modernise their houses practically free of charge. The state often covered the costs completely through subsidies.

This led to an increase in orders for craftsmen and enabled them to make long-term tax savings or sell the bills to banks.

Thanks to the introduction of the “super bonus 110 percent”, financial transactions and commissions were covered, which led to an increased modernisation trend.

Italians experienced an intensive modernisation wave in which heat pumps played a prominent role. Last year, heating installers in Italy installed half a million heat pumps, while in Germany it was only about half.

However, the climate effect of these measures is controversial, as most heat pumps are operated in combination with air conditioners and gas heaters. The heat pumps alone are often not enough to heat the houses. In cold days, the gas heaters take over the task of heating the living spaces and the water when the heat pumps are not sufficient.

Superbonus subsidised the installation of one million new gas heaters in Italy.

The combination of heat pumps and gas heating received considerable financial support, as many Italians do not want to give up gas heating completely. The alternative technology is often unsuitable, especially for historic buildings in medieval city centres.

Since most of Italy’s housing stock is older than 50 years and few new houses are being built in the countryside, one million new gas heating systems were installed last year, which were also co-financed by the super bonus.

However, the previous system was considered vulnerable to fraud. The credit could be transferred to banks, financial intermediaries or companies, with no limit or initial control. The current head of government, Giorgia Meloni, recognises the shortcoming and has already taken steps to change this.

2411 houses were to be rehabilitated in alleged ghost villages, but in fact it was a sham.

Potemkin villages were created to give the impression of industrious renovation work, when in fact no renovations were taking place. The financial police uncovered €3.2 billion in fraud last spring. Even municipalities around Avellino in the south of Italy were invented to support the alleged renovation projects.

In northern Italy, several companies have been exposed as having billed millions of euros in tax bonuses for energy-related façade renovations, even though they were never in a position to carry out such work. The government in Rome now estimates that almost every tenth euro from the subsidy programme was swindled.

Mainly rich property owners profited from the super bonus by achieving considerable increases in value at the expense of the state. This was not the aim of the left-wing Conte government.

Super bonus leads to price explosion and burdens Italy’s coffers.

The super bonus has led to no estimates being obtained for comparison purposes, explains Stefano Negri. This led to a price explosion for all work and equipment. The bill was presented to the government in Rome.

The various construction subsidy programmes have torn an additional hole of over 110 billion euros in Italy’s weak coffers since 2020. This amount is higher than the special funds that Germany invests in the Bundeswehr. In 2022 alone, 65 billion euros flowed into property modernisation via subsidies. This is more than what the state spends on education from kindergarten to university.

Meloni government curbs subsidies and causes resentment

The conservative Meloni government has sharply reduced the subsidy because of existing loopholes in the law and the state treasury. The subsidy rate has been reduced to a maximum of 90 per cent and now only applies to certain properties. This has naturally led to great resentment in the country.

According to the business newspaper “Il Sole 24 Ore”, projects worth 32 billion euros are currently affected by this measure in Rome. These are waiting for a new legal basis to contribute to the modernisation of the Italian real estate stock after all. This is not likely to be easy, however, as Brussels has recently warned that money will only flow from the EU reconstruction programme if Rome ensures transparent spending.

“The government has dealt a death blow to the construction industry,” reckons former prime minister Conte, who proudly points out that Italy has grown by 6.7 and 3.8 per cent respectively in the last two years. Not everyone, however, can understand the argumentation of the leader of the left-wing populist “Five Star Movement”. “If you want to generate sustainable growth, the state ultimately takes in more than it has spent,” the newspaper “Italia Oggi” instructs the politician. In fact, the Association of Italian Tax Consultants has calculated that only 43 percent of the subsidies paid out to the construction industry will ultimately flow back as tax revenue.

Demand for heat pumps collapsed: “The market is practically dead now”.

The government’s measures in Rome have unsettled homeowners and investors. In the capital, construction work on 1500 social housing units has even been halted because financing is uncertain. After the expiry of subsidies, builders now have to calculate more precisely what they can afford and what they cannot.

In Italy, interest rates for building loans are between 4.2 and 4.8 percent. Without the “super bonus”, many homeowners hesitate and forgo expensive renovation projects. Demand for heat pumps has also dropped sharply. “The market is practically dead now,” notes Stefano Negri of Mitsubishi.

The managing director of Vaillant Italia is also gloomy about the future: “Demand will drop sharply this year.” The heating industry is now calling for a relaunch of the bonus to boost business again.

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