The landmark law, championed by environmentalists, has come in for sharp criticism from Germans fearful of the high costs of switching heating systems, and has been credited with fueling a recent bump in ratings for the far-right AfD -- a fierce opponent of the measure.
Under the proposed new rules, all heating systems installed in the future will have to be powered in large part by renewable energy, as part of efforts by Germany to become climate neutral by 2045.
But critics say the original proposals amounted to a ban on new oil or gas boilers, with homeowners forced to pay out huge sums to get alternatives -- such as heat pumps -- fitted.
There has been a fierce backlash over the proposals, with top-selling tabloid Bild dubbing it the "heat hammer", and it plunged the three-party ruling coalition into its worst crisis since taking office in 2021.
The Green party had pushed the law but it was opposed by business friendly coalition partners the FDP, who argue it goes too far, and talks had appeared deadlocked earlier this week.
But after an emergency meeting overseen by Chancellor Olaf Scholz -- from the centre-left SPD -- the parties reached an agreement in principle, and the bill is to be introduced in parliament this week, political sources told AFP.
The news represented a breakthrough after the FDP earlier in the day refused to include the bill on this week's parliamentary agenda, putting a previously agreed plan of passing it by the summer recess at risk.
The legislation looked set for a significant overhaul as part of the deal, however.
FDP lawmaker Christian Duerr said the rules would come into force in 2028 -- rather than next year as originally planned.
The state would take on some of the cost of fitting new heating systems earlier, to ensure citizens are not unduly burdened.
In addition, the law would not focus only on "particular technologies," in an effort to avoid "horrendous installation costs", Duerr said.
Much of the criticism of the new law had focused on the high costs of installing heat pumps.
The cabinet had already signed off on the draft in April but, before it could pass parliament and become law, the row surrounding the measures deepened dramatically.
Anger over the government's climate agenda has played a major role in hammering the popularity of the Greens.
Meanwhile, the far-right Alternative for Germany (AfD) has seen its poll ratings soar in part by taking aim at the climate legislation.
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