By Aneria Bouwer Monday, March 10, 2008

The current, ongoing electricity crisis prompted many South Africans to invest at great cost in stand-by means of power supply, such as generators.  For example, according to media reports, FNB is spending approximately R88 million to expand its current network of generators.

Businesses may be able to write off these capital expenses over time, but individuals have been calling for tax incentives as compensation for having to incur costs to acquire generators and other back-up systems.

Although generators make commercial sense in the short term, it only increases South Africa’s reliance on fossil fuels.  For example, up to 128,000 litres of diesel is stored at FNB’s Bank City to enable its generators to run for three to four days.  Businesses and individuals should rather be encouraged to invest in renewable energy.

Minister Trevor Manuel during his recent Budget Speech took some steps towards addressing this issue, by introducing a 2c/kWh levy on electricity generated from non-renewable sources and by promising that tax incentives for cleaner production technologies will be considered.

Currently, section 12B of the Income Tax Act provides some tax relief for the generation of electricity from wind, sunlight, gravitational water forces and biomass comprising organic wastes, landfill gas or plants.  This section provides for an accelerated write-off period (50% in the first year, 30% in the second year and 20% in the third year) for the costs of such machinery used by a taxpayer for the purpose of trade.

For some businesses, section 12B could be very effective, while for others it would provide cold comfort.  For example, solar panels could be quite helpful for gymnasiums who need a constant hot water supply, but what about tenants of huge office towers?  How can they (or their landlords) be encouraged to switch to greener alternatives?  And how can energy service providers be encouraged to produce renewable energy?

A wide range of fiscal measures to encourage investment in renewable energy is implemented worldwide. A broad distinction can be made between fiscal measures intended to reduce taxes for users and producers of green energy, and taxes which are intended to penalise users of conventional resources.  Our new electricity levy is such a measure, intended to reduce reliance on non-renewable energy sources by 10%.

Common “incentive” measures include production tax incentives, property tax reductions; VAT exemptions, excise tax and import duty reductions, tax holidays, accelerated depreciation, tax credits or deductions for investments into research and development, and into both large-scale and customer-sited renewable energy applications.   Some of these programmes are intended to run for a limited period only to kick-start renewable energy industries and to make technology more efficient, more readily available and thus also more affordable.

Currently, the USA’s production tax credit (“PTC”) provides renewable energy facilities with a 1.9-cent per kilowatt-hour (kWh) tax credit for the first ten years of such facility’s operation.  The PTC program was implemented for only a few years, but it has been extended a number of times with the latest extension up to the end of 2008.  It has also expired on three occasions before being re-implemented.  According to the website of the Union for Concerned Scientists, the PTC program has been “a major driver of wind power development” since 1999.  During the times that the PTC program has been allowed to lapse, statistics showed a dramatic slow-down in the implementation of wind projects, with growth spurts when the PTC program was reinstated again.

According to presentations made to the US House of Representatives during 2005, Japan is an excellent example of how tax credits served to kick-start a renewable energy industry.  During 1994, Japan was installing approximately 500 solar heater systems per year.  It then introduced a long-term set of incentives.  During the next 10 years, the cost of solar systems dropped by 70% and Japan is now installing 70,000 solar systems annually.

The USA also introduced a number of federal tax credits for consumers, such as credits for home improvements relating to insulation, high efficiency heating and cooling equipment and for new homes using solar water heating and fuel cells.  Some of these measures, such as tax credits for solar water heating systems, are still available until December 2008 and provide taxpayers with a tax credit equal to 30% of the cost of the system.

USA tax credits are also available for buyers of energy efficient cars.  Manufacturers of energy efficient washing machines, dishwashers and refrigerators also qualify for tax credits.  Buildings with a 50% saving of heating and cooling energy could also provide their owners or designers with tax deductions of up to $1.80 per square foot.

In the UK, landlords are incentivised by the Landlord’s Energy Saving Allowance to install loft, cavity wall, floor and hot water system insulation in rental properties.  Certain district councils also offer council tax rebates to households that install energy efficiency measures.  The UK permits businesses to claim substantial capital allowances on motor vehicles with low carbon dioxide emissions, on natural gas and hydrogen refuelling equipment and on investment in selected energy-saving plant and machinery.

China, as a country with a fast-growing economy, has realised the need to balance its rising energy demand with its need to reduce its reliance on coal and imported oil.  China already has over 65 wind farms across 15 provinces in China and more than 200,000 stand-alone small-scale wind turbines providing electricity to households in rural areas, but is also taking additional steps, including the implementation of fiscal and tax policies and feed-in tariffs, to ensure that it will have 30,000 MW wind power capacity installed by 2020.

Minister Manuel in his Budget Speech acknowledged that “there is much to be done to develop specific and practical measures to support sustainable development”.  South Africa however has the advantage that it can learn from other countries’ successes and mistakes when designing and implementing an efficient and flexible renewable energy tax incentive system, to help us address our energy crisis in a sustainable manner.

Aneria Bouwer is a senior associate at Bowman Gilfillan