South Africa's Renewable Energy Goals are at Risk with the Section 12BA Tax Incentive Set to Expire in February 2025

South Africa's journey toward renewable energy goals are encountering significant hurdles. The latest report from the Presidential Climate Commission, title State of Climate Action (July 2024), lays out a sobering reality: the country is drastically behind its renewable energy targets. To achieve Net Zero by 2050, South Africa needs to ramp up its renewable capacity by an immense 190-360 Gigawatts (GW) - a target that equates to 6-12GW per year. Yet the current growth rate stagnates at just 1GW annually since 2015.

Compounding this challenge, the report highlights a critical shortfall in investment. Despite recent growth, the country faces a stark gap: annual investments of between R334 billion and R535 billion are needed, but only R131 billion has been committed on average. This massive discrepancy underscores the urgent need for a comprehensive strategy to attract and sustain the necessary funding.

One promising avenue for addressing this funding gap is donor funding, primarily through structured loans. However, it is clear that a wider array of sustainable and responsible mechanism is necessary to mobilize, retain, and expand investments in the renewable sector. This includes leveraging private climate financing, implementing effective tax-based incentives, and enhancing tax revenues and job creation. Such measures will not only boost the renewable energy sector but also bolster South Africa's global competitiveness in green economies.

Fortunately, South Africa has already taken significant steps in this direction. Section 12BA of the Income Tax Act, introduced in 2023, provides a crucial tax incentive designed to stimulate private investment in renewable energy. Businesses investing in renewable energy projects can claim a 125% deduction in their first year, with no capacity thresholds. This incentive is available for investments made between March 1, 2023, and February 28, 2025.

Given the promising outcomes and the need for continued investment, there is a strong case for extending this incentive. Discussions with investors and financiers suggest that extending Section 12BA until February 28, 2027, would significantly enhance the attractiveness of renewable investments. This extension would not only reinforce confidence among private and international investors but also align with the long-term goals of South Africa's energy transition.

The success of Section 12BA thus far is evident. Solar energy, in particular, has seen tremendous growth and is playing a pivotal role in diversifying and stabilizing the national grid. According to the African Solar Industry Association (Afsia), South Africa now hosts nearly 50% of Africa's solar capacity and achieved the continent's largest increase in solar installations during 2022 and 2023. This shift from government-led to privately funded projects underscores the effectiveness of incentives like Section 12BA in driving significant investment.

In light of these developments, it is crucial for South Africa's fiscal authorities to ensure that such successful incentives continue. A two-year extension of Section 12BA would not only affirm the Treasury's commitment to renewables and climate financing but also provide the stability and confidence needed for ongoing and future investments. In a country grappling with the weak economic growth and high unemployment, such measures are essential for a robust and inclusive energy transition.

In conclusion, as South Africa strives to overcome its renewable energy challenges, extending and enhancing tax incentives like Section 12BA will play a pivotal role in driving the necessary investment and progress. Our fiscal stewards must act decisively to ensure that the momentum for renewable energy continues to grow, supporting a sustainable and prosperous future.

Source: IOL Business Report