Europe’s Commission quietly shifts: electricity treated as infrastructure, not a tax base

A confidential European Commission recommendation has reframed the problem that has long hindered Europe’s shift to cleaner power: retail electricity is taxed and levied in ways that make it appear expensive relative to fossil fuels, discouraging investment in electrification. The recommendation advises governments to use existing legal options to lower VAT and excise on electricity, shift non-energy levies onto general budgets, and ensure electricity faces lower retail taxation than fossil fuels. Those steps aim to correct a policy-induced price distortion known as the spark gap — the ratio between retail electricity and retail gas prices — which routinely ballooned to multiple times in recent years and has routinely defeated otherwise sound electrification projects. Cutting VAT alone produces modest bill relief: for example, moving VAT from 21% to 10% reduces a VAT-inclusive price by roughly nine percent, useful but rarely decisive when electricity can cost two to three times as much as gas. Carbon pricing helps, but historically it has been absorbed upstream in power markets and insufficiently reflected at the point of household gas consumption; even a $100/ton carbon price adds only a couple of eurocents per kWh_th to gas bills, not enough to equalize costs. The Commission’s draft links the taxation issue to industrial competitiveness and investment certainty, noting that as renewables and long-term contracts proliferate, wholesale power will decouple from fossil fuel volatility and average electricity costs should fall. Using scenario assumptions for 2030 — lower retail levies plus a full ETS2 carbon signal — the recommendation’s back-of-envelope shows spark gaps narrowing substantially in countries like Germany and Spain but not disappearing altogether, leaving many direct substitution opportunities still marginal. Heat pumps and other efficiency multipliers are identified as low-hanging fruit: when devices deliver multiple units of heat per unit of electricity, distorted price signals lose their blocking power and projects become financially attractive. By contrast, high-temperature industrial processes and simple resistance heating remain sensitive to residual price gaps and will need deeper structural changes or targeted support. Politically, the paper is cautious; it recommends rather than mandates, gives Member States latitude on implementation, and does not propose offsetting revenue paths that would make the shift politically easier. That reticence reflects a familiar trade-off: governments rely on electricity levies for revenue and policymakers fear visible household impacts from changes in taxation. The Commission’s move nevertheless marks a notable tonal shift toward treating electricity as foundational infrastructure for competitiveness, security, and decarbonisation; execution and scale will determine whether this becomes a meaningful market correction or a modest, uneven adjustment across the bloc.