The role of tax incentives in addressing the energy crisis in South Africa

Abstract

The electricity generation industry is one of the most important industries, often referred to as the engine of the economy. However, in recent times South Africa has faced challenges of electricity supply being unable to meet growing demand, leading to load shedding. The electricity industry is also one of the biggest contributors to greenhouse gas emissions therefore must be at the forefront to address climate change. Various instruments are available to address these challenges. This dissertation explores the role of tax incentives in addressing the energy crisis in South Africa. Tax incentives have the potential of correcting market failures by promoting investments in the electricity sector. Incentives that are well designed and easy to administer can be effective in addressing the energy crisis. As tax incentives are a cost to the fiscus, their costs, including administration costs, must be weighed against their benefits, which includes social benefits. South Africa has an array of tax incentives that are applicable generally and specifically to the electricity industry, including those that promote investment in renewable energy to address the environmental externalities. The study finds that renewable energy incentives, with special focus on temporary rooftop solar incentives, are well-designed and administratively efficient with sunset clauses to address short-term challenges. The importance of base load electricity generation is highlighted and there is a potential to enhance incentives for such technologies. The Research and Development incentives are in line with international practice with room for improvement, particularly on the certainty principle as it pertains to the sunset clauses that are often amended. The energy efficiency incentive is found to lack simplicity and that could be a deterrent leading to it being ineffective. The importance of sunset clauses is highlighted to ensure that incentives are phased out without difficulty when their objective is achieved. The South African tax system is found to be one of the best in the world in terms of both systems and transparency, therefore, incentives are administered with ease. Lessons learnt from other comparative jurisdictions show that a combination of tax and non-tax incentives has assisted in accelerating investment in electricity generation. In particular, opening the industry to private electricity generators and providing incentives has led to greater investment in renewable energy and ensured that supply is able to meet growing demand while on course to meet climate change targets.