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Little-known tax incentives boost business case for renewable energy

Businesses that have installed solar PV in the tax year, or are about to do so, stand to benefit.

South Africa’s government, energy regulator and Eskom have often been criticised for obstructing the introduction of distributed, small-scale embedded generation (SSEG), which would help businesses to cut costs and ensure the stability of their power supply during load shedding.

But in fact there are significant and far-sighted tax breaks which have been put in place by National Treasury to encourage and incentivise business owners to install their own generation in the form of grid-tied, rooftop or ground-mounted solar PV systems on buildings, parking lots, warehouses, factories and farms.

Accelerated depreciation allowances

From January 1, 2016, a little-known amendment to Section 12B of the Income Tax Act (Act 58 of 1996) allows for depreciation in the year of commissioning of the full (100%) cost of a grid-tied solar PV system of less than 1 MW used for electricity generation by a business in the course of its operations.

The capital depreciation allowances for solar PV systems greater than 1 MW remained unchanged in the January 2016 amendment to the legislation, which continues to allow full depreciation over three years. This permits depreciation of 50% of the capital cost in the year of commissioning, 30% in the subsequent year, and 20% in the third year.

The accelerated depreciation allowance for solar PV systems applies whether they are installed for the business by contractors or developers, or paid for by the business in a credit sale agreement (as defined in Section 1 of the Value-Added Tax Act) – either upfront in a single payment or in multiple payments over an extended period.

The cost of the solar PV system allowed for accelerated depreciation includes its full direct capital cost, including design and engineering, project planning, delivery, foundations and supporting structures, solar PV panels, AC inverters, DC combiner boxes, racking, cables and wiring, and installation. Finance costs are excluded.

This allowance was confirmed in a binding private ruling by Sars dated October 11, 2018 (BPR 311) in respect of an application by a private company in South Africa to clarify the deductibility of the capital expenditure incurred to install solar PV systems at a number of sites owned and leased by the applicant. The systems were being installed to reduce the company’s electricity costs.

The improved business case

Whether paid for upfront after commissioning, or in multiple payments over an extended period, the benefits of this tax incentive to business owners, particularly for solar PV systems of less than 1 MW, are significant.

Where the company tax rate is 28% and payment is upfront, a 100% tax-deductible depreciation allowance in the year of installation and commissioning will result in a 28% nett discount on the purchase price of the system at the end of the tax year.

This significantly affects and reduces the payback period of a solar PV project of less than 1 MW.

Better still, when paying for the same solar PV system on a credit sale agreement through multiple payments over an extended period, the transaction can be cash-flow positive for the business over the lifetime of the solar PV plant in all but the first months to the end of the tax year during which commissioning takes place.

With these significant tax incentives, and the rapidly rising price of grid electricity, the business case for installation of grid-tied, rooftop and ground-mounted solar PV is fast becoming a no-brainer.

Shout out from the rooftops

What is most surprising, however, is how few business-owners and companies are aware of these tax breaks, which can make such a positive impact on their cashflow and bottom line.

This lack of awareness is perhaps a result of the difficulties faced in accessing relevant information on the subject from Sars itself.

For example, efforts to simply download or view the up-to-date amended Section 12B of the Income Tax Act from the Sars website and the public internet proved fruitless. Similarly, no response or even acknowledgement of receipt was received to a query sent to the Sars media desk.

Only after a time-consuming search and a paid subscription to a private tax information service provider was this possible.

In an article in Engineering News on August 14, entitled “Time to end silence on renewables misinformation – Sapvia chair”, the new chairman of the South African Solar Photo-Voltaic Industry Association (Sapvia), Mr Wido Schnabel, said: “The organisation will become more assertive in outlining the benefits of solar for South Africa and in correcting some of the prevailing misperceptions about the role of variable renewable energy in the country’s future electricity system.”

The tax incentives available to businesses for the installation of solar PV systems is certainly something that Sapvia and other related industry associations should be ‘shouting from the rooftops’ in the interests of their members, as well as those of developers, installers and suppliers of solar PV systems, components and services.

The challenge

Businesses that have installed solar PV in the 2018/19 tax year, or are about to do so, stand to benefit substantially. The Council for Scientific and Industrial Research (CSIR) estimates that there was close to 400 MW of installed solar PV in the country at the end of 2017, and that up to 200 MW was installed the following year. With wider understanding of the business case, this could be much higher in future.

Most of these installations are less than 1 MW – which is all that most private businesses require across a wide range of sectors of the economy, including manufacturing and retail.  

If only the various arms of government, business, labour and communities were on the same page and working with a common purpose to bring the benefits of SSEG to the productive economy and the environment, to address the current electricity and water supply constraints, and to facilitate economic growth and the creation of quality jobs.

Chris Yelland is investigative editor at EE Publishers and Mariam Isa a freelance journalist.

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Rooftop is a no-brainer for some types of business (wine cellars and cold storage businesses especially). eg cold storage energy is near perfectly aligned with the time of year and day that PV produces best.

It gets tougher in many other businesses. Doing a small system that you will self-consume is always a no-brainer. If you will often over-generate energy that you then need to export to grid, the math is tougher : municipalities give you peanuts and some actually charge you more for the right to export than you will get for the peanuts!

Be careful of the sales pitch : do the math only on energy costs – it is virtually certain that you will not make much change to your notified demand or peak demand costs.

I would think it would apply to any business that uses electricity during the day time. Weekends could be a bit tricky for some like office parks but any retail store would make a lot of sense I’d think.

I mean even if you say are closed on Sunday then you are still getting decent upside if you get a competitive price to begin with and then write off 28% of that price. Feeding into the grid is almost a bonus.

Teamed: it sort of depends how lumpy your energy use is – over a day as well as over a year. Especially how high your peak kVA spikes relative your average kVA.

Explanation: if you hum along at 100kVA 75% of the time but other times run 400kVA you would want big enough solar to dent those high periods and get credit for when your big solar is producing but exporting. Otherwise you end up with a little 60kVA solar system that does not dent your total energy much.

I look forward to the day that the effective cost of storage is under 200c/kWh. Then you can really reduce your bill by using big solar and running off batteries (or supplementing) in the eye-watering peak rates.

The ideal and fair way would be credits at a discount to the municipality’s Eskom rate. If cities carry on wanting exports at much lower than their own purchase price they will simply encourage people to move some types of loads off-grid : eg pumps, chillers, aircons. Then they will lose the availability fees and the energy profits. It is actually not hard to do with a very modest storage system. Bugger is the inverter-chargers cost a lot more than grid-tied.

For the company I work for it was a complete no brainer, ROI in 22 Months.
And that was excl the tax incentive.

Johan: What is the current effective cost of storage? Thanks.

Swazi:

It depends a lot on how big (the price per kWh storage drops massively with size), but then part of the size calc is how often you are going to cycle. Say you are going to cycle it twice a biz day to a sane level, then let’s call it 500 cycles per year

The solar part runs around R10-R12 at scale, R16 at residential.

It also depends what of the bits and pieces you allocate to storage. So you can do solar with a grid-tied inverter that is now very affordable, but it stops when the grid stops. It needs an energy source to work into. Those run say R1.2/W at the bigger sizes. If you want loadshed solution you need an inverter-charger or hybrid. It can run through loadshed off solar or off battery and many can auto-start a generator. Basically it is a UPS. The good ones can run short heavy loads for a lot more than their sticker value and they can run their sticker value whether grid is on or not and solar is on or not. Many ones quote you say 20kW, but smallprint is that this is grid-interactive and the number off solar or batteries is a lot less. Anyway, a good one will run you more like R6-R7/W.

A big lithium battery will run around R7/kWh but for usable capacity and long life work on R10/kWh. For 4 hours of energy shift you need 400% of battery, maybe less as few loads run a 100% load factor all the time.

Well-managed:
The solar will be good for 25years easily so let’s assign 40% for 10y of the solar to storage : R4
The inverter-charger 10y life : say R6
The battery at least 5000 cycles, so 10y is all of its life, so call it R8 but that 400% explained makes it around R30

So your capex is about R40/w for a system that will give enough solar (and more at times) to cycle 500 times a year

On a 100kW solar system (good for 160,000 kWh per year) with a hybrid inverter than can carry 100kW delivery when on grid or on solar & battery, with enough storage to run off battery for your cycling you are in for R4m. You will have run through the storage part 100kW x 4h per day for 250 days for 5 years = 500,000 kWh or over R8/kWh on the R4m. You will obviously have generated about 800,000 kWh off the solar, so you can offset a bit but you will end up over R5/kWh

essentially, solar storage through batteries in regular cycling is expensive even compared to (current) peak eskom tariffs. It does compare very well to the real cost of generators that are not a UPS and are a pain in real life. Last year I was running R5,000 a week diesel but getting 500 liters to site is as painful as paying, then the servicing and noise and etc. before my generator goes I am going big solar and big battery, hopefully a flow battery will be realistic then. It will prob work back to R5/kWh by 2021

There are many holes in above basic answer that would need a whole paper to go into. There is a good paper from Lazard on LCOS if you want to look deep

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