What next after end of renewable energy incentives for SA?

From the newsletter
South Africa's renewable energy incentive is coming to an end in a month's time after two years. This incentive allowed businesses to claim an upfront deduction of 125% of the cost incurred to acquire qualifying assets used in the generation of electricity (including supporting structures) against their taxable income.

• The incentive was implemented in March 2023 when South Africa was experiencing the worst load shedding in its history. This policy proved instrumental in driving a twenty-fold increase in annual solar installations within the commercial and industrial sector, reaching 2.2 GW by 2024.

• Another incentive that targeted residential customers between March 2023 and February 2024 allowed customers installing solar panels to claim a rebate for 25% of the cost of new and unused PV panels, up to a maximum of $820.

More details

• In Africa, where a majority of the population still faces poverty, affordability remains a big challenge. This was particularly true when renewable energy products first entered the market. To encourage adoption, governments have relied on providing incentives. As a new technology, adoption wasn't hindered solely by cost, but also by perception. Most consumers lacked knowledge and trust in these new products. This phenomenon is common even in developed countries, where governments often incentivise new products to encourage adoption, as we see currently with electric vehicles in Norway and the USA.

• Many African governments implemented various policies and incentives to lower the cost of renewable energy technologies. These policies have spurred growth. We've witnessed this in Kenya, Rwanda, Ghana, and Egypt, where solar energy is experiencing rapid growth.

• Such supportive policies were essential in the early stages when the sector was nascent, prices were high, and technology was less mature, the sector has changed. Today, solar technology is more advanced, supply chains are established, and multiple players, particularly from China, have entered the market, increasing competition and driving down prices.

• Several African countries initially implemented policies and incentives to nurture their fledgling renewable energy markets. Now, as these markets mature, they require less support. Kenya and Uganda, for instance, have already begun phasing out solar incentives in their 2024 budgets.

• South Africa, as one of the most mature renewable energy markets in Africa, with stronger supply chains, better policy and regulation, and a wider range of players including international companies, no longer requires incentives and should be allowed to develop organically.  

• Demand from commercial and industrial customers is strong, and numerous suppliers are competing effectively. The market has reached a point of balance and stability where it can grow independently. However, there is a risk of imbalance if the financing sector cannot meet the anticipated increase in demand for financing.

Our take

• Incentives can drive change, and it has worked well in moving solar energy from a nascent to a mature market. It's now time to let market forces control demand and pricing. However, this progress is not uniform across all African countries. Some are just beginning their solar journeys and need more support, especially incentives to lower the cost and make renewable energy more attractive.

• With the removal of incentives during these challenging economic times in South Africa, more people will likely need financing options to adopt solar energy. This trend has been evident in the automotive sector, where an increasing number of people are seeking financing to purchase vehicles. The same will likely apply to renewable energy.

• Energy companies can seek partnerships with asset financing companies to enable those who cannot afford the equipment upfront to pay in installments. This approach has been particularly successful in Kenya with M-KOPA. Now that M-KOPA operates in South Africa, they can expand their product offerings to target this growing market.