Navigating the energy transition tax incentive landscape in South Africa

Tax incentives have become a critical tool in driving the adoption of renewable energy in South Africa, particularly in light of the ongoing energy crisis and a global shift away from the use of traditional fossil fuels. 

Despite recent progress made by the South African government in introducing and tweaking certain tax incentive legislation to stimulate investment in renewable energy projects, the country’s energy mix remains heavily reliant on an ageing fleet of coal-fired power stations, which still produce around 70% of the country’s electricity. 

There is therefore much more to be done to significantly shift the energy mix for a more sustainable energy future in the next two to five years. 

A short history of renewable energy tax incentives in South Africa

South Africa’s journey towards incentivising investment in renewable energy began in earnest in 2016 with the introduction of Section 12B of the Income Tax Act of 1952 (Tax Act). 

This legislation aimed to promote the use of renewable energy by offering accelerated tax deductions for capital investments in the production of renewable energy. 

These initial measures were unfortunately not sufficiently robust to drive real uptake in the sector.

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The energy crisis that intensified since then necessitated a more ambitious approach to the uptake of renewable energy production. 

The South African government subsequently introduced more tax incentives through section 12BA of the TAX Act from March 2023, and this time targeting both households and businesses. 

Through the newly introduced legislation, businesses undertaking renewable energy projects, including photovoltaic solar energy, wind power, biomass and more, were offered a 125% upfront tax deduction on capital expenditure related to renewable energy initiatives brought into operation within a two-year window, with no limit on generation capacity. 

This move was specifically aimed at speeding up the adoption of renewable energy by small and medium-sized energy users in order to alleviate strain on the national grid.

Impact of incentives under the current landscape

The enhanced incentives under section 12BA had a noticeable impact, particularly among businesses with the financial capacity to undertake medium to large-scale renewable energy projects as a means of generating electricity.

Household incentives, on the other hand, were less impactful. The benefits were restricted to solar panels used for the production of electricity, and excluded batteries for the storage of electricity. 

It appears that only a small segment of the population, those who could afford the upfront costs, could take advantage of the incentive. 

Tax incentives for the EV sector

Looking forward, the next frontier is the provision of highly attractive incentives to large manufacturers of electric vehicles (EVs). One industry that is offering some hope to re-igniting the economy is South Africa’s all-important vehicle manufacturing industry. 

Beyond renewable energy generation, South Africa is now looking to position itself as a hub for EV manufacturing. 

In the recently issued 2024 Draft Tax Laws Amendment Bill new tax incentives have been proposed that aim at stimulating investment to create a thriving new EV sector in the country. 

These incentives are designed to set South Africa up as a future competitor in the global EV market, considering that major trading partners like the UK are moving towards stricter CO2 emissions standards and that the diesel and petrol vehicles South Africa has produced in large volumes over the past few decades will start to become unattractive to our main export markets.

The proposed EV hub incentives follow a similar structure to the incentive for renewable energy production, by offering a tax deduction of 150% on qualifying assets used mainly in the production of electric and hydrogen-powered vehicles in South Africa. 

The qualifying assets must be brought into use on or after 1 March 2026 and before 1 March 2036. This strategy aims to make it attractive for new players to enter the EV space.

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What needs to happen next to fast-track South Africa’s energy transition

To sustain and accelerate the energy transition, there are several steps that can be taken including the following:

1. Extend the incentive period: The incentives provided under section 12BA of the Tax Act are available only until February 2025. This incentive was introduced to accelerate investment by businesses in renewable energy generation capacity, within a “constrained fiscal envelope”, however, it is the belief of many experts that the two-year period provided to undertake these projects is too short. This two-year restriction may limit the ability of the intended companies looking to invest in renewable energy projects as these projects at times require a significant amount of time to get off the ground due to the complexity of the projects. With complex projects, extensive planning and development may be required and they may also be subject to delays due to the need to obtain regulatory approvals. 
2. Broaden the scope of incentives: Future incentives should cover a wider range of components, including storage solutions. For example, the exclusion of storage technologies in the current household incentives significantly limits the scheme’s effectiveness as the bulk of the cost associated with installing a renewable energy solution lies within the storage component. 

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In conclusion

It is commonly believed that tax incentives can drive taxpayer behaviour. It can and must play a critical role in boosting South Africa’s energy transition. While we’ve seen some positive changes for large-scale projects, there is a clear need for broader, more comprehensive, longer-term incentives. 

Extending the duration, broadening the scope, and ensuring more investor-friendly structures, will help the country to build up the momentum it needs to create a renewable energy economy and to achieve its sustainable development goals.

Looking to the future, it is critical that the policymakers effectively address the ever-evolving energy needs of the country through smarter, more comprehensive incentives, to build a vastly more resilient, sustainable and investor-friendly energy future for South Africa.

The focus should be around the investment into renewable energy generation, storage and transmission by an array of participants – from ordinary South Africans to small and large businesses, multinational investors, and even our Special Economic Zones. 

This is one of the key ways to usher in the large-scale Just Transition the country so sorely needs. 

Written by: Benjamin Mbana. A tax specialist and Director at A&O Shearman (previously Allen & Overy)