By Imraan Mukadam and Shaun Nel
South Africa is so far behind its renewable build goals that only a Herculean effort, galvanised by practical, certain and trusted mechanisms that foster confidence, will get us there. And in our haste to attract big ticket investments, we cannot afford to miss the easy wins that are essential to this build and within grasp.
The State of Climate Action by the Presidential Climate Commission report (July 2024) articulates some cold truths. In order to meet our Net Zero target by 2050, South Africa needs to grow its renewable capacity by 190-360GW, or 6-12GW each year. Our capacity is growing at just 1GW per year from 2015.
More critically, it found that there are “limited investments in the just transition, from public, private, international and domestic sources”.
Although these have grown in recent years, the report evidenced that investments between R334 billion and R535bn per annum are required. An average of just R131bn per year has been committed – a staggering shortfall on anyone’s calculation.
Donor funding, mostly through structured loans, is one way South Africa is raising the capital and confidence needed. But it’s patently clear that every possible sustainable and responsible mechanism, vehicle and incentive must be deployed to attract, retain and expand all investments to fund the renewables build.
Private climate financing and tax-based incentives that have a proven track record of fostering economic growth are fundamental, plus expanding tax revenues, growing jobs and skills, and improving South Africa’s ability to compete internationally in the green economies of today and tomorrow.
The good news is that South Africa has an optimally structured climate and renewables financing tax incentive in place to assist in encouraging the domestic market and private capital to play their part in South Africa’s long-term just energy transition.
Section 12BA of the Income Tax Act was introduced in 2023 as a temporary expansion of tax incentives for businesses to promote renewable energy to encourage private investment to alleviate the electricity crisis:
Businesses can claim a 125% deduction in their first year of investment in renewable energy projects, with no thresholds on generation capacity.
The incentive is available for investments brought into use for the first time between March 1, 2023 and February 28, 2025.
Our engagements with investors and financiers in renewables and climate financing indicates that there is much more value to be unlocked for South Africa’s energy transition, which motivates for an extension to section 12BA from the deadline of February 28, 2025 to February 28, 2027.
Our experience over 25 years in advising private capital on incentives, including in the automotive industry, convinces us that tax incentives in renewables investments are essential in any just economic transition that is founded on stable, reliable, sustainable energy sources and an inclusively growing economy that can compete in international markets.
But it’s not just savvy investors that can use the incentive based on a short-term income tax deduction to contribute to South Africa’s energy transition, and to deliver predictable and strong returns over the long-term.
Put plainly, our fiscus cannot afford to let the sun set in February 2025 on incentives like section 12BA that drive the right investment behaviour for the right reasons and at a critical time.
In an environment of weak economic growth, unemployment at 33.5% and 8.4 million South Africans without jobs, a two-year extension of section 12BA of the Income Tax Act for investment brought into use before February 28, 2027 would be a strong endorsement of the work that Treasury has devoted to renewables and climate financing, and would serve to provide the confidence and trust that private domestic and international markets require for their long-term investments.
Solar has demonstrated huge growth and utility in the South African industrial, commercial and residential markets as a significant contributor to a more stable grid, and a more diverse, cleaner energy mix. According to a recent report from the Africa Solar Industry Association (Afsia – January 2024), South Africa leads the way and hosts nearly 50% of the continent’s solar capacity. Furthermore, during 2022 and 2023, South Africa made African history with the biggest increase in solar installations on the continent.
The Afsia report also shows a distinctive shift in historical patterns. Before, most solar installations were commissioned by national governments with international support, and today, most megawatts are installed off the national Budget, through private funding for commercial and industrial projects directly on site, for on-site consumption.
Data like this shows that incentives like section 12BA work well to direct private funding in the right direction. Such incentives should be supported and encouraged for further vital investment in renewables, especially solar in our abundantly sunny South Africa. Our fiscal stewards in the Treasury cannot let the sun go down on successful incentives like section 12BA of the Income Tax Act.
Imraan Mukadam and Shaun Ne are directors of African Green Alpha at DG Capital
BUSINESS REPORT