South African businesses are already receiving a number of benefits from the state and state related entities in an effort to boost investment in renewable energy, promoting more efficient use of energy usage and friendlier environmental practices.
Seeing that energy generation is not only one of the major emitters of CO2 in South Africa, but also one of the major hurdles for development, the majority of the incentives already available are aimed at helping businesses to become more energy-efficient and in some cases even self-sustainable. SARS has developed a number of tax based regulations aimed at helping businesses invest in and benefit from renewable energy projects.
Environmental tax breaks
Under the current legislation, section 12B of the Income Tax Act, businesses can depreciate investments in renewable energy and bio fuel production at a rate of 50:30:20. By allowing accelerated depreciation on these assets, SARS is giving businesses a cash flow advantage which should assist in the investment in renewable energy projects. The amendments to the Income Tax Act section 11 and 12B now propose that support structures related to the investments in renewable energy and bio fuel production should be depreciated at the same rate as the Plant and Machinery depreciation rate detailed above. The reasoning behind the amendment is to allow businesses implementing the renewable project to receive benefit for the majority of the costs of the projects, not only for the physical wind turbines, solar PV panels and similar energy-generation equipment. This amendment will make it easier for businesses to become self-sustainable in the long run.
South African businesses receiving benefits from Clean Development Mechanisms (CDM) are exempt from tax on revenue derived from such benefits, be it in the form of Income Tax or Capital Gains Tax. This benefit is described in section 12K of the South African Income Tax act signed into law in September 2009. Because it takes between 2 and 5 years for a CDM project to generate revenue, this will be the first time that the entity will be able to draw benefit from this tax concession. CDM projects often take a significant amount of time and a lot of capital to implement; by allowing businesses to take advantage of a tax break on the income derived from these types of projects, the government is encouraging investment in research and development.
Under section 12L of the Income Tax act, SARS has also created income tax breaks for entities that become more energy-efficient. Energy efficiency is seen as one of the “low hanging” fruit in the country’s efforts to become a low-carbon economy, and certain structures have been put in place to encourage more efficient use of electricity. This section of the Income Tax Act allows for the generation of energy-efficiency certificates, verified by accredited professionals and awarded by the South African National Energy Development Institute (SANEDI) operating under the auspices of the Department of Energy. The government has come to realise that the efficient use of energy will lead to a higher net income in businesses, thus by allowing the generation of energy-efficiency certificates businesses will not pay tax on the certificate allowance and thus will be encouraged to become more efficient.
Environmental Investment Incentives through the DTI
On 4 June 2012, the DTI launched the Manufacturing Competitiveness Enhancement Programme (MCEP) aimed at ensuring the relevance of the South African manufacturing industry on the international playing field, as well as helping to protect South African jobs against the effects of an influx of imports. A major component of this grant programme is an allowance for expenditure on Green Technology and Resource and Efficiency Improvement. The government has allocated R5.8billion to this programme over the period 2012 to 2015. The grant is calculated according to the Manufacturing Value Ad of business, which can then be used on a cost sharing basis where the DTI pays between 50% and 30% of the costs of category, Green Technology and Resource and Efficiency Improvement.
It seems that the South African government realises that the manufacturing industry is one of the largest consumers of electricity, and will also be the industry hardest hit by increases in electricity prices. It is also evident that this industry has long benefitted from cheap energy and has not made any effort to become more efficient. The DTI has for a number of years been offering incentives to businesses investing in the manufacturing sector, and therefore has the capability to administer an incentive programme of this nature.
Environmental Investment Incentives through the Eskom
There are also a number of energy-efficiency incentives available through Eskom, collectively known as the Integrated Demand Management (IDM) programme. This programme consists of three main sub programmes or funding models, namely an ESCo programme, a Standard Offer programme and a Standard Product programme, each with its own structure, requirements and funding model linkable to the requirements and status of different businesses. The ESCo programme encompasses all energy-efficient projects with incentives linked to the energy-saving and cost of implementation of the energy reduction project. In this programme, a monitoring and verification plan has to be developed specifically for the project, and be used in ongoing monitoring to ensure that the entity meets the performance contract with Eskom. The second incentive programme is known as the Standard Offer Programme, which is a scheme through which Eskom buys back energy savings from the entity over a period of three years. The energy savings are the collective energy savings over three years for an energy-efficiency project which is then purchased by Eskom at a rate of between 42c and R1.20 per kWh depending on the technology chosen. The entity can expect 70% of the total energy savings after the implementation and verification if energy savings, and 10% per year for the three years following the implementation of the project.
The main elements Eskom plans to support through this programme are improvements in lighting, process optimisation, building management, electrical hot-water systems and renewable energy.
The third and final incentive programme available under Eskom’s IDM scheme is the Standard Product offering, which is centred around lighting retrofits, where Eskom pays the entity a set rebate upon completion of the project based on old and new technology, as well as an operational load factor.
It is evident from the incentives and support structures that Eskom offers, that the entity has taken a holistic view of all the ways in which its product is used, and how these can be made more efficient, or even self-reliant. The programmes on offer from Eskom sound promising on paper, but one might ask how efficient their execution will be in practice.
Additional environmental incentives
The incentives mentioned in this section are not conclusive, as there are also a few other grant and support structures available from the government, aimed at assisting businesses to invest in renewable energy initiatives. These include a section 12i allowance, which is an additional tax allowance for large-scale capital investment projects, section 11D allowance for taxpayers involved in research and development, allowing a tax allowance of up to 150%.
The Critical Infrastructure Programme and the Enterprise Investment Programme, are both linked to investment projects being allowed financial assistance from the government. The Renewable Energy Finance and Subsidy office has also been developed to assist in finance provision for renewable projects, allowing up to R1mil grant for every Megawatt installed, with 6 projects being financed in 2010 and 24Mw being subsidised.
For more information on these incentives, please feel free to contact Dirk Harris at 021 443 6850 or firstname.lastname@example.org.