Financial and Fiscal Incentives Applicable to South Africa’s Renewable Energy Sector: A Balancing Act

Introduction  

South Africa has the largest mineral reserves in the world, yet it is unable to benefit from its resource wealth. A primary cause of this is its extractive legal frameworks. The uncertainty caused by its extractive legal frameworks and somewhat overly strict regulatory requirements is a significant deterrent for investors, being one of the most important stakeholders needed to successfully exploit South Africa’s vast resources. So deterred are investors that South Africa ranks in the bottom ten least attractive mining investment jurisdictions, according to the Fraser Institute.

So, too, is the state, as a role player, constitutionally mandated to ensure the environment is “protected, for the benefit of present and future generations, through reasonable legislative and other measures…”.[1] One way the state can achieve such ends is by convincing investors to move away from conventional extractive practices and shift towards renewable energy. Meeting such ends is particularly important in the face of a growing climate crisis and the global imperative to ensure temperatures remain below two degrees Celsius by the end of the century.

Two of the primary enabling instruments through which investor and state interests can be balanced as well as the above ends met, is through financial and fiscal incentives to promote the adoption of renewable sources of energy and attract investment into South Africa’s renewable energy sector. This blog explores some of South Africa’s financial and fiscal incentives within its renewable energy sector. It does so with the aim to draw attention to the financial and fiscal incentives available to investors.

While there are various statutes and policies which inform the design of South Africa’s financial and fiscal legal frameworks to attract investment into its renewable energy sector, two primary statutes relevant for purposes of this blog are the Income Tax Act 58 of 1962 (“ITA”) and the Carbon Tax Act 15 of 2019 (“CTA”).[2]

Financial and Fiscal Incentives for Investing in Renewables

There are several financial incentives aimed at attracting investment into South Africa’s renewable energy sector. For example, the manufacturing competitive enhancement programme, initiated through industrial finance loan facilities, provides allowances to investors who intend to upgrade or expand renewable energy facilities. South Africa’s financial incentives also include financial assistance to small enterprises wishing to enter the renewable energy sector, through the green energy fund. Additionally, investors can also make use of the favourable market prices provided by South Africa’s feed-in tariff, when investing in its national power grid.     

Investors should further be attracted to South Africa’s renewable energy sector through several fiscal incentives, most of which are contained under the ITA. For example, section 12B(1)(h)(i)-(iv) of the ITA provides investors with allowances should there be a depreciation of their movable renewable energy assets used for the first time. Furthermore, section 12U(1)-(3) of the ITA enables investors to deduct expenditure incurred when constructing or improving certain infrastructure necessary for renewable energy projects. Section 12(I)(8)(a)(ii)(aa)-(bb) of the ITA goes further by realising the cost of maintaining and advancing renewable energy projects, including all relevant assets, by making provision for allowances to the improvement of energy efficiency or a cleaner production technology. Similarly, should investors wish to make improvements to land or buildings, as per section 12N of the ITA, or should investors wish to train their employees for purposes of their renewable energy project, they will be allowed certain expenditure deductions pursuant to section 12I(1A); (4) of the ITA. Should such improvements be to the land or buildings of certain third parties, for the purposes of renewable energy projects, section 12N(1)-(3) of the ITA would find application, enabling allowances, albeit subject to a few exceptions. 

While the above provisions are largely applicable to renewable energy assets, investors are also encouraged to save energy, in which case they would be entitled to deductions pursuant to section 12L of the ITA. So, too, could saving energy come in the form of acquiring environmental assets for the first time, provided they are aimed at environmental treatment, recycling or waste disposal. In such a case, section 37B(2)(a)-(b) of the ITA would apply, enabling investors to claim certain allowances. Lastly, investors could claim deductions for expenditure incurred should they conserve land, pursuant to section 37C of the ITA.

Carbon Tax as a Disincentive

While fiscal incentives are aimed at transitioning investors away from conventional extractive practices towards renewable forms of energy to meet the state’s constitutional imperatives, should investors fail to make use of such incentives, the CTA serves as a primary disincentive. For example, the CTA disincentivises conventional extractive activities by taxing corporations on greenhouse gas emissions, with the aim to ensure greater regard is had to the environmental impact of their activities.[3] However, as with fiscal incentives under the ITA, the CTA also extends allowances to investors involved in, amongst other things, fossil fuel combustion, industrial process and fugitive emission activities.[4] So, too, is provision made for a carbon offset allowance, in terms of which the emitter can either contribute to a carbon offset project or reduce emissions.^[5]

Conclusion  

South Africa’s uncertain and tumultuous extractive regulatory climate deters many investors. Such deterrence prevents the state from effectively fulfilling its constitutional obligations. This is especially so given that the state relies on the revenue’s investors generate to fulfil its socio-economic obligations and other functions.

However, even with such regulatory uncertainty and lack of investor confidence, South Africa has an opportunity to attract investors to its renewable energy sector through its financial and fiscal legal frameworks. Hence, through various financial and fiscal incentives, including disincentives, the state can fulfil one of its most important functions, namely, to protect the environment for the benefit of present and future generations.