The commercial and industrial sector generally incurs higher electricity costs for being the highest energy users. To mitigate against these rising operating costs South African businesses are investing in alternative energy production such as renewable energy and energy efficiency to lower the input costs often associated with electricity in South Africa. This increase in need for alternatives has created a vibrant but highly competitive distributed solar energy market in South Africa.
The South Africa distributed solar energy market is expected to grow at a CAGR of around 4.5% by 2026, driven largely by increased demand in the commercial and industrial sectors. The key drivers of solar market growth have been highlighted as Affordability and Improved Return on Investment (ROI) of solar technologies.
Furthermore, the South African Government has made the eagerly anticipated announcement of amending the Electricity Regulation Act 4 of 2006 to allow for the construction of embedded generation projects of up to 100MW, without a generation license which should stimulate further investments towards renewable energy projects.
The potential for renewable energy projects to be part of the just energy transition is bolstered by the availability of capital allowances in the Income Tax Act 58 of 1962 (Income Tax Act), i.e. tax benefits for renewable energy capex projects. Section 12B of the Income Tax provides for a deduction of the costs of acquiring and installing any machinery, plant, implement, utensil or article used in the types of generation projects listed in section 12B(1)(h) (Generation Asset). The cost of any asset for purposes of section 12B also includes the direct cost of installation or the erection thereof.
In cases of plant and machinery used in the generation of electricity from photovoltaic solar energy (i.e. Solar PV) in respect of energy less than 1 megawatt, the taxpayer may write off 100% of the costs of such plant or machinery in the year brought into use.
Accessing the Tax Incentives for Solar Capex projects…
With this incentive, companies can deduct the value of new solar power system as a depreciation expense from its company’s profits. This effectively means that a company’s income tax liability will be decreased by the same value as the value of the installed solar system. This reduction can also be carried over to the next financial year as a deferred tax asset. This is a direct saving of 28% on the purchase price from day one on the solar system.
To claim the allowance the Generation Assets must be brought into use for the first time, for the taxpayer’s trade and be owned by the taxpayer or purchased under a qualifying instalment credit agreement. Businesses installing solar energy systems should therefore carefully consider the tax deductions in terms of section 12B to ensure that all relevant costs are claimed for income tax purposes and thereby improve the ROI of their renewable energy investments.