How tax incentives can be used to induce investment and growth
RELIABLE, efficient, affordable and sustainable electrical infrastructure is as key to investment and growth as oxygen is to our lungs. We cannot drive investment and grow an equitable and inclusive society without energy to fuel economic activity.
The frequency and the intensity of load shedding in recent months has increased the cost of doing business in South Africa to unsustainable levels, likely to result in reduced production and a contraction in the size of our economy.
We, therefore, cannot hope to grow investment without addressing security of energy supply as the main driver to the cost of doing business.
Consequently, incentives to unlock renewable energy opportunities and build electricity supply resilience in the economy are a priority.
The government announced in 2021 a $8.5 billion (R153.3bn) climate finance package to support our just transition from coal and bolster energy supply.
The funding is available from 2023 to 2027. A total of 80% of it has been prioritised for bolstering the electricity infrastructure and supporting the transition to renewable energy; and 10% for the support of new technologies, specifically the development of a green hydrogen industry and an electric vehicles industry to support our automotive manufacturers and protect jobs in the sector.
To galvanise the economy, the priority for the country has to be an accelerated implementation of the Just Energy Transition climate finance plan.
Energy resilience facility
There needs to be direct funding for critical infrastructure for the utilities to stabilise electricity supply and transmission. Secondly, there needs to be an energy resilience facility for the private sector that offers subsidies to facilitate faster migration to solar energy, particularly in employment intensive businesses and vulnerable businesses.
Small businesses are more adversely affected by the energy challenges in the country because cash flow constraints limit their ability to invest in alternative or back-up energy solutions. It was, however, encouraging to note the recent announcement from the Department of Small Business Development (DSBD) that they are working on an energy relief package for small businesses to lessen the impact of load shedding.
For the support to make an impact, it should focus on reducing the reliance of small- to medium-sized enterprises on the national electricity grid and it should be simple to administer and easily accessible.
The DSBD should not rely exclusively on government agencies to offer support, but should work with private sector banks and financial intermediaries to assist small businesses with asset finance or rental solutions for solar energy or uninterrupted power
supply systems. De-risking renewable energy projects
Last year, government liberalised the embedded generation market by removing the registration requirement for private sector projects that wish to invest in utility scale renewable energy projects for their own use and potentially for distribution to other consumers.
In the recent update of the country’s Energy Action Plan, government reports that this has resulted in generation capacity of 9 000MW in the pipeline.
There is an opportunity to accelerate private investment in generation capacity by increasing access to finance for these projects.
A key mechanism for improving access to finance is reducing the risk to early-stage projects through providing grant funding to private sector banks and financial intermediaries to be used for project preparation facilities, to assist in developing investment ready renewable energy projects that the banks can fund.
Currently, project preparation facilities are largely the domain of development finance institutions.
It is estimated that up to a third of all the project preparation facilities that exist across the African continent are housed at the Development Bank of South Africa.
Opening this market to private participation could unlock more projects, given the extensive footprint of the banking sector and the remit of the banks to provide finance.
Industrialisation of the renewable energy value chain
A number of economies around the world have announced renewable energy industrialisation strategies supported by funding and incentive packages to ensure the development of a sustainable and globally competitive renewable energy industry.
For example, the European Commission has launched the REPowerEU Plan, a €210 billion (R4 trillion) programme to reduce reliance on Russian fossil fuels and accelerate the green transition.
Similarly, the US announced at the end of last year an American Battery Materials Initiative for sourcing and processing critical minerals used in the power, electricity and electrical vehicles industries, as well as a $2.8bn grant funding to 20 manufacturers for the manufacturing of batteries for the electric vehicle industry, and additional tax credits for consumers to make buying electric vehicles with battery components from the US more affordable.
South Africa in turn has a Renewable Energy Masterplan (Sarem) to unlock industrialisation opportunities in the renewable energy industry.
Sarem outlines opportunities for supply of key input materials; production and assembly of components; as well as systems assembly for the solar, wind and battery storage industries.
The majority of the interventions proposed focus on the opportunities presented by South Africa’s renewable energy public procurement process through the Renewable Independent Producer Programme.
However, given the activity in the private sector market since the lifting of regulatory restrictions, there is a need to look at the lessons learnt from the development of a globally competitive automotive industry in South Africa.
Policy instruments introduced in the sector have incentivised key leading automotive original equipment manufacturers (OEMs) to locate their production facilities in South Africa and a value chain of different tiers of suppliers has developed around these OEMs – leading to growth of the industry and jobs.
These lessons should be applied to the renewable energy industry. Providing a suite of incentives that includes investment incentives for technology innovation and to set up manufacturing and assembly operations; import duties for strategic inputs; credits for exported components; as well as skills development support, may assist in moving Sarem from a government plan to a catalyst for private sector investment in developing the renewable energy value chain.
Innovation and energy efficiency
Currently, the government offers an energy efficiency tax allowance of 95c/ KWh energy equivalent for energy efficiency savings.
Although this incentive is not available for renewable energy projects, it is an important tool to support the decarbonisation of our economy as it promotes investment in more energy-efficient technologies.
Research and development (R&D), particularly in markets of the future that are presented by the alternative sources of energy imperative, is key to the growth of our economy.
We look forward to seeing in this year’s Budget, confirmation of the extension of the R&D tax incentive to encourage more investment in R&D by the private sector.