POWER CRISIS: How government tax incentives for rooftop solar energy panels could work

The government wants to encourage more households and businesses to instal rooftop solar energy panels and, in the process, offer them tax incentives for reducing their dependence on Eskom and the national grid. 

The plan, which will see SA join the ranks of the US, the UK and Germany, which have similar tax regimes, was announced by President Cyril Ramaphosa in his recent State of the Nation Address.

The shape and mechanism of the tax incentives remain unknown but the full details are likely to be unveiled in the Budget Speech on Wednesday, 22 February. 

DM168 canvassed tax and economic experts on how the mooted tax incentive could work. It could be designed in two ways: it could include specific tax benefits targeting households and individual consumers, and others targeting businesses.

Legal limitations on tax benefits

For households and businesses, the government could make solar panel installations tax-deductible (known more formally as capital allowances), paving the way for them to be able to get refunds when tax returns are filed every year. This might be a favoured avenue considering that there is already a tax system in place for deductions. 

But it has legislative limitations.

The Income Tax Act, which governs the taxation of income, provides for capital allowances relating to renewable energy and the generation of energy from solar panels. But the act only targets businesses, allowing them deductions if they use solar panel installations for trading or business activity. They can deduct the value of their solar power systems as a depreciation expense from the profits they generate.

So the legislation makes no provisions or incentives for households or individuals that have solar panels for their personal electricity consumption.

Tertius Troost, senior manager for tax consulting at Mazars, says the National Treasury could push for amendments to the act and broaden it to allow tax incentives for such households. But legislative amendments take a long time to be passed and SA cannot afford more delays in energy generation and security.

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“For example, the deduction would then be allowed against an individual’s remuneration or personal income. One would need to see whether this route is taken, as it could be perceived by the public as putting money back into the pockets of higher net worth taxpayers,” says Troost.

After all, solar panel installations are expensive – typically costing from R60,000 upwards – so only a privileged few might be able to benefit from tax incentives.

An option the government could consider is not imposing VAT on solar materials, including panels, inverters and batteries for storage, known as zero rating. But tweaking a VAT system is considered controversial and time-consuming.

“The VAT option would be improbable, as it is not always guaranteed that the VAT saving will be pushed through to the consumer, but could only result in producers or installers taking a higher profit margin.

“If a solar panel currently costs R3,000 per panel, including VAT, and panels are suddenly zero-rated, one expects the price to decrease to about R2,600 per panel. What could happen is that producers and installers don’t decrease their prices at all, or only decrease the prices slightly, thereby the benefit does not filter through to the end consumer,” says Troost.  

Another tax consideration the government could implement is globally accepted and implemented, mainly in the UK and Australia: offering households subsidies, grants or low-interest loans for solar panel installations. But Troost doubts that this is possible because the government’s finances are weak and there is no fiscal room to hand out more money to the public for solar installations. Government red tape will also stand in the way of implementing this.

Tariffs for households and businesses

Another complication is that there is no nationwide framework for a feed-in tariff payment that households and businesses would receive from the government for generating and providing excess solar energy into the electricity grid. The National Energy Regulator of SA has only recently approved a feed-in tariff for Cape Town, which now has a solar tariff of 78.98c/KWh, and the City will add 25c/KWh to that.

The move to solar is happening at a swift pace because of the worsening impact of blackouts. But because SA doesn’t have a large local solar panel and equipment manufacturing industry, the goods are mostly imported.

Lullu Krugel, chief economist at PwC, estimates that in 2022 SA imported solar panels worth more than R5-billion – up from about R4-billion in the previous year. “We estimate that these panels will provide an additional 2,000MW of generating capacity [equal to Stage 2 blackouts] in 2023,” she says.

A source close to Ramaphosa and his Presidency says the first prize would be a tax incentive system that equally benefits everyone, including the solar panel manufacturing industry, businesses and households.

“Striking that balance will be difficult. We have had many debates. It is now up to the National Treasury to announce a workable and inclusive solution.” DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.