0% tax on electricity: Why Germany is merely watching the British model – The €6.6 billion loss

Electricity price shock in Great Britain: Is Germany missing a historic opportunity?

Zero percent VAT on electricity: A Segen for households, useless for industry?

Great Britain is leading the way: The British government has simply abolished VAT on household electricity altogether, thus providing relief to millions of citizens. A glance across the English Channel inevitably raises the question of why German consumers still have to pay the full 19 percent tax rate on their already high energy costs. Current calculations show that a similar step in Germany could drastically reduce electricity bills and save households billions – yet politicians are hesitant. Our detailed analysis reveals why a zero-percent model would be a real Segen for private consumers, while German industry would hardly benefit, and what obstacles stand in the way of such a tax reform in Germany.

Tax exemption for electricity: What the British model would mean for Germany

The decision by the new British government to completely abolish VAT on household electricity casts a harsh light on German energy pricing policy and reveals how much financial leeway actually lies dormant in the domestic tax architecture.

As one of his first acts in office, the new British Prime Minister, Andy Burnham, announced a reduction in the value-added tax (VAT) on household electricity from five percent to zero. The measure is set to take effect on October 1, 2026, and is initially limited to the end of March 2027. According to the British government, this will reduce the annual electricity bill of an average household by approximately £45, or around €53. The resulting tax shortfall of approximately £850 million in the current fiscal year will be financed by scrapping a controversial digital identity card project, which had been budgeted at £1.8 billion over three years. The announcement was deliberately timed to coincide with the next adjustment of the UK's electricity price cap by the regulatory authority Ofgem, so that the tax relief would not be offset by a simultaneous increase in the cap. However, observers are already pointing to a potential rise in the price cap of over three percent, which could significantly reduce the net effect of the tax cut.

The bill for German households in detail

The comparison portal Verivox has calculated what a comparable measure would mean for German consumers, and the figures are considerable. If VAT on electricity were completely abolished in Germany, private households could be relieved of a total of around €6.6 billion per year, while the average electricity price would fall by about five cents per kilowatt-hour, or around 16 percent. For a family with an annual consumption of 4,000 kilowatt-hours, this would mean savings of about €198, for a couple with 2,800 kilowatt-hours consumption around €139, and for a single-person household with 1,500 kilowatt-hours about €74. By comparison, the German VAT on electricity is currently at the full standard rate of 19 percent, significantly higher than the UK's initial rate of five percent, demonstrating that an identical measure would have a considerably greater percentage impact in Germany than in the United Kingdom. The federal government and the states would have to forgo an estimated 6.6 billion euros in tax revenue – a sum that seems hardly politically feasible given the already strained budget situation.

A cheaper, but weaker alternative

Verivox has calculated not only a complete abolition of VAT but also a significantly more moderate alternative: reducing the separate German electricity tax to the European minimum rate. This measure would lower the electricity price by around two cents per kilowatt-hour, which would mean savings of approximately €93 for a family with an annual consumption of 4,000 kilowatt-hours, €65 for a couple, and €35 ​​for a single person. These figures are considerably lower than those of the British model because, unlike VAT, the electricity tax is not levied as a percentage of the total price but as a fixed amount per kilowatt-hour. This makes a significant difference for households, as a VAT reduction affects all price components as a percentage, while a reduction in the electricity tax alone only reduces a small, fixed component of the total price. Therefore, anyone wanting to achieve the greatest relief for private consumers will find it difficult to avoid a VAT reform, even if it is the more expensive option fiscally.

How the German electricity price is actually composed

To understand the implications of a potential tax reform, it's worth examining the structure of German electricity prices. According to the latest electricity price analysis by the German Association of Energy and Water Industries (BDEW), the average household electricity price in 2026 will be around 37.0 cents per kilowatt-hour, with procurement and distribution costs accounting for the largest share at 15.2 cents. Network charges average 9.3 cents per kilowatt-hour, a decrease of 1.6 cents compared to the previous year, due to government subsidies for transmission network charges. Taxes, levies, and surcharges for household customers total 12.6 cents per kilowatt-hour, representing more than a third of the total price. This illustrates the significant influence the government has on electricity prices in Germany compared to other countries. A look at this composition shows that, unlike in Great Britain, where the VAT on electricity was already significantly reduced at five percent, Germany, with the full standard rate of 19 percent, is clearly at the upper end of the European scale, which also explains why a reform in this country would be more effective, but at the same time also fiscally more expensive.

Why companies would hardly benefit from a VAT exemption

The crucial difference between private households and businesses lies in the German VAT system itself, and this is precisely where the central misconception often arises when superficially examining the British model. For VAT-registered businesses, the VAT shown on the electricity bill is not a final burden, but merely a pass-through item. Through input tax deduction, businesses can reclaim the full amount of VAT paid on their electricity bill from the tax office or offset it against their own VAT liability. Therefore, abolishing VAT on electricity would simply offer no liquidity advantage to a typical VAT-registered business, because it was already not economically burdened by this tax through input tax deduction. The only real effect for such businesses would be a slight improvement in liquidity, as less input tax would need to be pre-financed – an effect that would be barely noticeable given the typically short refund cycles.

The situation is different for the groups that would actually benefit from a VAT exemption on electricity, namely those not entitled to deduct input tax. This includes, in particular, small businesses that make use of the small business regulation and therefore cannot claim input tax, as well as many non-profit organizations, associations, churches, and certain areas of the public sector, such as schools or administrative buildings, that do not carry out any business activity in the VAT sense. These are precisely the groups that were explicitly considered in the British model, where small, non-VAT-registered businesses, charities, and care facilities are specifically intended to benefit from the reduced or eliminated tax. For the vast majority of traditional industrial and commercial enterprises in Germany that are entitled to deduct input tax, however, the direct effect of a VAT exemption on electricity would be marginal.

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The truly relevant relief instruments for industry

While value-added tax (VAT) is largely neutral for businesses, the separate electricity tax plays a completely different role. It is a genuine consumption tax that cannot be reclaimed via the input tax deduction mechanism and therefore actually incurs production costs. For the manufacturing sector, the electricity tax was already reduced to the European minimum rate of €0.50 per megawatt-hour on January 1, 2024, by increasing the relief amount under Section 9b of the Electricity Tax Act from €15.37 to €20.00 per megawatt-hour. This significantly reduced the effective tax burden for industrial companies, while simultaneously eliminating the previous peak load compensation under Section 10 of the Electricity Tax Act. This is now incorporated into the new, higher relief under Section 9b, which even results in less bureaucracy for companies, as proof of an energy management system will no longer be mandatory.

According to the German Federal Government, the tax revenue losses due to the previous peak electricity tax equalization scheme amounted to approximately €1.375 billion in 2023, while the total relief from the new electricity price package for 2024 was estimated at around €3.25 billion solely due to the expansion of Section 9b. This is supplemented by a further €1.3 billion from the continuation of electricity price compensation and the so-called super-cap for particularly energy-intensive companies. For energy-intensive businesses competing internationally, electricity price compensation within the framework of the Climate and Transformation Fund and the super-cap remain the crucial levers, as these specifically offset the indirect CO2 costs from the European Emissions Trading System. According to the Federal Ministry for Economic Affairs and Energy, around 350 and 90 particularly energy-intensive companies, respectively, benefit from this.

According to the BDEW electricity price analysis for 2026, the current average electricity price for small to medium-sized industrial companies is 16.7 cents per kilowatt-hour – a decrease of 0.9 cents compared to the previous year, which is also largely attributable to the government subsidy for transmission network charges. For medium-sized industrial companies with an annual consumption between 20 and 70 million kilowatt-hours, the price was 15.9 cents in 2025, while for large industrial companies with an annual consumption of 70 to 150 million kilowatt-hours, it rose slightly to 14.4 cents. These figures show that the relevant cost components for industrial companies lie less in value-added tax (VAT) and more in network charges, procurement, and remaining levies. Therefore, political debates about relief for companies logically focus on these instruments and not on VAT.

Why Germany is unlikely to follow the British example

The political situation in Germany differs fundamentally from that in Britain. Burnham's government was able to secure funding for its measure relatively easily by simply scrapping an already controversial digital project, which had been deemed a failure by a cross-party parliamentary committee, and redirecting the freed-up funds. A comparable, readily available source of €6.6 billion annually does not currently exist in the German federal budget, especially since public finances are already under considerable pressure due to rising social spending, defense expenditures, and interest payments. Furthermore, in Germany, value-added tax (VAT) is a shared tax affecting both the federal and state governments, making reform politically more complex than in a more centralized system like Britain's. In addition, VAT on energy in Germany is traditionally defended on the grounds that energy, unlike basic necessities, is not considered essential for survival in the strict sense of tax law and is therefore subject to the full standard rate, whereas other European countries, such as the UK, have historically provided for a reduced rate for household energy.

It is also noteworthy that even the British measure was not without its critics in the professional community. Critics argue that the tax cut does not address the actual structural problems of the British electricity grid, such as insufficient grid capacity and high system costs, but merely provides short-term cosmetic relief. Furthermore, the measure in Great Britain is deliberately limited to the end of March 2027, which demonstrates that even the British government views it more as a short-term instrument against the cost-of-living crisis and not as a permanent structural reform of energy taxation. Financial services expert Martin Lewis also pointed out in his analysis that consumers should not overestimate the impact of the tax cut, as it only represents a reduction of approximately 4.8 percent on the total price of the electricity bill and by no means brings about a noticeable turnaround in the face of continued high energy costs.

A question of political priorities

Ultimately, the realization remains that the question of exempting electricity from VAT is less a technical one than a profoundly political one. Purely mathematical logic clearly shows that such a measure would have a more noticeable impact on private households in Germany than in the United Kingdom, due to the higher initial VAT rate of 19 percent compared to the British rate of five percent – ​​resulting in total relief of €6.6 billion annually and savings of between €74 and €198 depending on the household type.

At the same time, a closer look at the German VAT system reveals that such a reform would be practically ineffective for the vast majority of German companies, as they do not bear the VAT burden through input tax deductions anyway. Genuine relief for industry is achieved through entirely different instruments, particularly the electricity tax, grid fee subsidies, and electricity price compensation for energy-intensive sectors. Therefore, anyone discussing the British model should avoid the mistake of conflating household and business perspectives. The real debate about the competitiveness of German industry will be decided not by VAT, but by structural location costs such as grid fees, levies, and CO2 costs. For private households, however, the British announcement serves as a wake-up call, demonstrating that the German tax architecture on energy does indeed contain untapped potential for relief, should the political will to implement it ever exist.

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