Private investors are putting up money to stop load shedding

Investing in installations that offer attractive cash returns without the red tape involved when dealing with Eskom.

Politicians and government officials are forever bleating that the private sector needs to contribute to fix the failures of government departments and state-owned entities.

These pleas range from helping schools, hospitals, trains and ports, all the way to helping the police maintain law and order. Nowhere else is the plea more urgent than in the supply of electricity, and nowhere else has the private sector responded so quickly.

The truth is that generating electricity – for self-use or for sale – is not difficult given the advances in technology. It also presents profitable investment opportunities, thanks to the sharp price increases forced on the consumer by Eskom.

And it is necessary, given the recent announcement that load shedding has returned for an undefined period.

In addition, government has offered a tax incentive to those investing in renewable energy projects.

Tax incentive

According to Section 12B of the Income Tax Act, taxpayers (individuals, trusts and companies) can offset their full investment in a solar energy system against their taxable income.

The Section 12B allowance has however been increased from 100% to 125% for the period 1 March 2023 to 28 February 2025, giving taxpayers an additional 25% – with the proviso that the projects start generating electricity in the respective tax years.

This restriction – that projects need to start producing electricity before the end of February 2025 to qualify for the special tax allowance – is another indication of the urgency of the electricity crisis.

The allowance is available to individuals and companies who install their own renewable energy systems, such as rooftop solar systems.

More interestingly, investors who invest in large-scale renewable energy projects can also get the 125% tax allowance, which enhances their investment returns.

Jeff Miller, CEO of Grovest and head of its Twelve B Green Energy Fund, says the new Section 12BA tax allowance follows on the success of the previous Section 12J incentive, which was aimed at stimulating investment in fixed infrastructure.

The difference is that the tax allowance has been upped from 100% in Section 12J to 125% under Section 12BA.

Sizeable tax break, with no maximum

The 125% tax allowance is realised upfront as a tax deduction (accelerated wear and tear allowance on the full amount invested into a solar kit), according to Miller.

“This reduces taxable income by 125%, so an individual saves 125% times 45% in taxes,” he says, assuming an investor who is taxed at the highest marginal rate.

“The accelerated wear and tear allowance can be set off against all other taxable income as defined in Section 2 of the Income Tax Act.”

Section 12B allows for a tax deduction in respect of certain qualifying assets (owned and brought into use after 1 January 2016) to reduce the taxable income of the taxpayer.

These qualifying assets must be used for purposes of trade in the generation of electricity from renewable sources, according to the South African Revenue Service (Sars).

Miller says the provisions do not put a cap on investment in renewable energy for purposes of tax benefits, while the 125% accelerated tax allowance increases the overall after-tax return for investors.

Project entry

Grovest offers investors the opportunity to invest in smaller commercial and industrial renewable energy projects through its Twelve B Green Energy Fund.

It is the second fund of its type, and aims to invest in around 10 projects of around R7 million to R10 million each.

Miller says the fund partners with specialists to design, install, maintain and operate the solar systems.

“The fund owns the assets, such as the solar panels, batteries and inverters, and collects the monthly revenue from the clients,” he says.

“Typical projects include systems for factories, shopping centres, hospitals, office blocks and residential estates where people want to generate their own electricity.”

Investment case

Focusing on mid-size installations and dealing directly with the end user avoids a lot of red tape associated with larger projects that need to negotiate with Eskom for access to the national grid and for selling of the electricity, although not excluding the possibility of selling excess electricity to other users.

The Twelve B Fund enters into an offtake agreement with the user for 20 years, at a specific price and with a fixed annual escalation.

“The escalation would be around the consumer price index plus 1.5%. This allows customers to plan and budget better, rather than being surprised with irregular increases of 12% or 14% per annum,” says Miller.

“It also offers investors more certainty in their expected returns.

“We are not exposed to anything surrounding the grid, as we are not selling to the grid or wheeling through the grid, but directly to the end customer. The only major variability would be CPI, as this is what we peg escalations to.

“With that being said, the Reserve Bank aims to keep CPI between 3% and 6%, which reduces variability to a certain extent.

“The power purchase agreements we enter into with the users can stipulate either a fixed or variable rate, and as such the pricing is all contractually bound,” says Miller.

The Twelve B Green Energy Fund is structured for a term of 10 years and income will be distributed to investors every six months.

It will invest in renewable energy projects that will start to generate electricity up to the end of February 2025 in accordance with the tax regulations.

he fund will issue investors with a tax certificate for the details to be included in their annual tax return.

“If you don’t utilise your full tax allowance in the current year, it can be carried over to the following years,” says Miller.

He adds comfort to investors concerned about Sars changing the tax benefit: “Sars is not known to retrospectively change rulings. They may extend or retract rulings from today onwards, but not retrospective[ly].

“However, when the solar kit is sold at the end of the term, Sars will require a recoupment on the allowance, up to 100% of the cost. Our financial models assume 100% recoupment of the wear and tear allowance in year 10, but still offer returns higher than a lot of other assets,” says Miller.

While the term of the Green Energy Fund is 10 years, there is no minimum prescribed period to hold the asset to benefit from the 12B allowance as Grovest offers a structure to ensure liquidity. – moneyweb.co.zw