The policy and regulatory framework
i The policy background
There are very limited government-led regulatory and tax incentives for renewables. As already noted, the current regulatory regime in South Africa does not allow for excess electricity from renewable sources such as residential or rooftop solar to be sold back to the grid, and a reform to allow for this would stimulate and promote faster growth in the rooftop solar market. The situation is compounded by the absence of significant tax incentives or other government-led programmes to foster development of the renewables market. Nor are there any tariff top-up arrangements like those seen in renewable energy programmes elsewhere in Africa, such as the successfully implemented GET FiT programme in Uganda. Although feed-in tariffs were initially proposed in South Africa, these were superseded by the auction process now known as REIPPPP, which has proved hugely successful, with each further round being heavily oversubscribed.
As from 1 January 2016, Section 12B of the Income Tax Act (South Africa) No. 58 of 1962 (the Income Tax Act) changed the three-year accelerated depreciation allowance on renewable energy (50 per cent to 30 per cent to 20 per cent) to an even quicker depreciation allowance of one year (100 per cent). This accelerated depreciation allowance came about from a proposal in the 2015 draft Taxation Laws Amendment Bill that the definition of solar energy be amended to distinguish between solar PV energy of more than 1MW, solar PV energy of less than 1MW and concentrated solar energy. The amended Section 12B provision now provides for an accelerated capital allowance of 100 per cent in the first year, in respect of solar PV energy of less than 1MW.
The reason for the change is to accelerate and incentivise the development of smaller solar PV energy projects, as these have a low impact on water and the environment. This is also intended to help address the energy shortages facing South Africa in a more environmentally friendly way.
Section 12B of the amended Income Tax Act provides for a capital allowance for movable assets used in the production of renewable energy. More specifically, it allows for a deduction equal to 100 per cent in respect of any plant or machinery brought into use in a year of assessment for the first time and used in a process of manufacture or any other process of a similar nature. Notably, the allowance is only available if the asset is brought into use for the first time by the taxpayer. In other words, the allowance is not limited to new or unused assets. The wording merely prevents the taxpayer from claiming the Section 12B allowance twice on the same asset.
With this incentive, companies can deduct the value of their new solar power system as a depreciation expense from its profits.
At the time of writing, the Carbon Tax Act 15 of 2019 (the Carbon Tax Act) had been signed into law. The Carbon Tax Act provides for a basic tax-free threshold of around 60 per cent of emissions and additional allowances for specific sectors that may result in tax exemptions for up to 95 per cent of emissions during the first phase until 2022. The full carbon tax rate is proposed to be 120 rand per tCO2e, after exemptions. The effective tax rate is expected to be between 6 and 48 rand per tCO2e.
The updated draft IRP has provided for a small allocation of 1 per cent to the CSP technology under REIPPPP. The CSP technology is seen to provide much higher costs compared with solar PV and wind. The challenge of intermittency is likely to be solved by the ever increasing introduction of battery solutions; it is unclear, however, on what scale this can be financed in the local marketplace.
ii The regulatory framework
In South Africa, the regulation of electricity from renewable sources falls under the jurisdiction of the National Energy Regulator (NERSA), one of three energy regulators established under the National Energy Regulator Act 2004 (NRA), which regulates electricity, piped gas and petroleum pipeline industries. Eskom’s tariffs are regulated by NERSA under the Electricity Regulation Act 2006 (the Electricity Regulation Act). These tariffs are based on Eskom’s costs plus a reasonable rate of return.
The NRA, together with other key legislation regulating the relevant industries (in the case of electricity, the Electricity Regulation Act) establishes the framework for renewable energy regulation in South Africa. That legislation, together with associated regulations, notices, rules and guidelines, grants expansive regulatory power to the regulators, including the powers to issue, amend and revoke licences, as well as to approve tariffs.
Under the Electricity Regulation Act, a licence is required for each operation (i.e., for electricity generation, transmission and distribution facilities, and in respect of the import, export and trading of electricity – collectively, the Licensed Activities), but it provides exemptions for licences in respect of (1) any generation plant constructed and operated for demonstration purposes, (2) any generation plant constructed and operated for own use, (3) any non-grid-connected electricity supply other than for commercial use, and (4) any other activity relating to the Licensed Activities for which NERSA has determined that a licence is no longer required. In relation to the latter exemption, NERSA may require that persons undertaking the activity concerned nevertheless register it with NERSA.
A person obliged to hold a licence in terms of the Electricity Regulation Act must apply to NERSA for the licence in the form, and applying the procedure, prescribed. The application must be accompanied by the prescribed licence fee. The information required for such an application includes, among other things:
- a description of the applicant, including any vertical and horizontal relationships with other persons engaged in the operation of the relevant Licensed Activity;
- the administrative, financial and technical abilities of the applicant;
- a description of the proposed generation, transmission or distribution facility to be constructed or operated;
- a detailed specification of the services that will be rendered under the licence;
- a general description of the type of customer to be served;
- the proposed tariff and price policies; and
- evidence of compliance with the IRP.
The process entails publication of notices of the application in appropriate newspapers or other media and the applicant responding to objections to the application being granted, and it culminates in NERSA making a decision on the application within the prescribed period.
Transfer of control and the assignment of a licence issued in respect of Licensed Activities, including generation licences issued to IPPs, are restricted by conditions imposed on the licensee by NERSA. Accordingly, each licence must be reviewed on a case-by-case basis to determine what specific approvals are required for its transfer. However, the Electricity Regulation Act generally provides that a licensee may not cede or transfer its powers or duties under a licence to any other person without the prior consent of NERSA. The transfer of control and the assignment of licences issued to IPPs are further regulated by the implementation agreement between the South African DoE and the IPP; that agreement provides for, inter alia, government support for the development and financing of relevant IPP projects.
The initial IRP sets out the South African government’s strategy for the establishment of new generation and transmission capacity for the country for the period 2010 to 2030. It calls for the doubling of the country’s electricity capacity from its 2010 level of 238,272GWh, using a diverse mixture of energy sources, mainly coal, gas, nuclear and renewables, and including large-scale hydro to be imported from other countries in the southern African region. The initial IRP further details how this demand should be met in terms of generating capacity, type, timing and cost. The initial IRP also serves as an input to other government planning functions, inter alia, economic development, funding, and environmental and social policy formulation; it is also a means to determine the requirement for further investment in electricity generation capacity for South Africa.
At the time that the IRP was initially promulgated, the South African government advised that the IRP should be viewed as a ‘living plan’ that would be revised by the DoE every two years to ensure its relevance with regard to (among other things) technological and environmental developments in the global arena. An update to the IRP was provided for public comment in August 2018; however, this document has yet to be submitted to the cabinet for approval. It became necessary to revise the initial IRP following capacity additions through ministerial determinations under Section 34 of the ERA, and to bring up to date key assumptions that have changed significantly since the promulgation of the initial IRP. Although the Minister of Energy released a draft of an updated Integrated Energy Plan (IEP), a subsequent draft has not been provided for public comment. The IEP serves as the government’s master plan for the entire energy system, with its focus on the broader objective of reducing the country’s energy footprint overall. The IEP regulates energy industries and promotes electric power investment, greater employer benefits and a more favourable environmental impact. The IRP on the other hand, being subordinate to the IEP, focuses specifically on electricity.