South Africa – The increase in energy efficiency savings tax incentives announced in South Africa’s budget on Wednesday is a step in the right direction and will help chip away at the energy problem in the country, says Standard Bank.
The energy crisis received strong mention during the budget after President Zuma’s State of the Nation Address on February 12 which included strategic plans at Cabinet level to get to grips with the problem. Finance Minister, Nhlanhla Nene, provided more details about what this would entail.
“A much-needed move to extend the incentive to co-generation projects was announced. We are talking about potentially big energy efficiencies via co-generation, as in some countries this can amount to 10% of total electricity generating capacity. But a lot of industrial companies have been waiting for the incentives,” says Berrie de Jager, Head of Natural Resources at Standard Bank.
The incentives allow businesses to claim deductions based on energy saved. “It won’t solve the energy crisis, but it is certainly a step in the right direction,” he says.
Co-generation is the process of centrally generating electricity at large-scale power plants and separately generating useful heat onsite and is recommended by the Department of Energy as a useful way to bring about energy-saving benefits.
“It is important that the government includes the private sector in its plans to resolve the crisis. President Zuma spoke about the importance of creating partnerships in the State of the Nation Address and this was emphasised again in the budget. Achieving a priority like resolving the energy crisis must include all stakeholders and so this move sees government creating policy that makes the private sector part of the solution,” says De Jager.
Apart from creating employment opportunities in the industrial sector, co-generation also reduces greenhouse gas emissions, the provision of effective additions to the electricity generation base and diversification of resources. It relates to projects utilising process energy which would otherwise be underutilised or wasted, such as waste heat or waste flue gas from industrial processes, or projects where in addition to electricity, the project produces consumable heat such as process steam.
Minister Nene said on Wednesday that given electricity supply constraints, additional measures were needed to manage demand. Government is therefore considering an increase in the electricity levy from 3.5 c/kWh to 5.5 c/kWh. “Electricity shortages hold back growth in manufacturing and mining, and also inhibit investment in housing and raise costs for businesses and households,” the Minister said.
However, De Jager says the 2c/kWh increase is a temporary measure to be withdrawn when the electricity shortage is over. Normalisation of the electricity reserve margin is however not expected in the short term; hence payment of this temporary increased levy might impact taxpayers for a number of years to come.
The additional revenue will be used to fund the broadening of the scope of the energy-efficiency savings tax incentive to include co-generation and an increase in the amount available. Also under consideration is enhancing the accelerated depreciation for solar photovoltaic renewable energy.
De Jager says energy-intensive users are likely to come under the glare of government and extra levies may be headed in their direction quite soon.
“Government is examining loopholes that unduly favour intensive electricity users, and so a levy that will apply to users and exporters of electricity who consume in excess of 800 000 MWh per year is being considered,” he says.
To prevent the possibility of double taxation, a credit of 5.5 c/kWh could be provided for users if the price they pay is above 37 c/kWh, but before any measures are proposed, government will consult with industry, the electricity regulator, Eskom and other interested parties.