How Section 12J is helping drive SA’s clean energy revolution

Stage 6 load-shedding this week has underscored the severe energy crisis that our country is facing right now.

This is further compounded by Eskom’s recent announcement that it expects a R20bn loss for its upcoming full-year results, in addition to the fact that it is saddled with R450bn in debt.

However, the load-shedding challenge is driving a new wave of solutions which could result in our country becoming a global leader in clean energy solutions.

The Section 12J silver lining

Tax legislation such as Section 12J and Section 12B are playing a crucial part in helping to bring billions of rands in investment to this space.

As the pioneers in the Section 12J space, Grovest Corporate Advisory are promotors of two highly innovative green energy funds, Decentral Energy and Rencell Limited.

Both of these Section 12J funds provide capital for hi-tech clean energy installations across the country, helping to power up businesses, retailers and residential developments.

From small-scale to utility-scale projects

Decentral Energy is mandated to invest in clean energy (in commercial and industrial) that are underpinned by long-term Power Purchase Agreements (PPAs) developed and managed by a team of experts.

Examples include small-scale PV Power project’s installations as seen, for example, at Gauteng’s Northmead and Southdale Malls. These projects are off-balance sheet solutions where landlords purchase the energy produced and recover the cost from their tenants. This is attractive from an investors perspective as it simultaneously reduces the credit risk and creates a value chain which is a win-win-win for landlord, tenant, and investor

The tenants, in turn, get shielded from double-digit energy price increases while the roof rental helps increase landlords operating yield on their portfolio by allowing them to rent out an area which would otherwise have been unable to generate revenue.

Another example that Decentral Energy focuses on is that of utility-scale projects. Here, Decentral team have developed over 100 MW of utility-scale hydropower assets across South Africa.

These assets have included the development of the 5MW Kruisvallei Hydropower facility in Ash River, Eastern Free State; as well as the 24MW-40MW Meerkat Hydropower plant near Hope Town in the Northern Cape, among many others.

Decentral Energy has a pipeline of R100 million to be deployed by August 2020 into the commercial and industrial clean energy sector. In addition, the 12J nature of this fund ensures that 100% of an investment into Decentral Energy is deductible from an investor’s taxable income in the year in which the investment is made enhancing investor returns up to a 20% internal rate of return.

Powering up gated communities

Rencell Limited provides ‘micro-grids’ that are solar PV and lithium battery storage installations for sectional-title developments or private residences. These installations enable residents to experience uninterrupted power supplies, even during load-shedding.

The potential growth for Rencell Limited’s offerings is significant, especially when considering that there are currently 6 500 gated residential communities in South Africa with a potential demand for power of around 3 000 MW.

Investors in these installations receive financial returns by means of an asset-backed annuity income.

But what makes Rencell Limited even more unique is that it not only provides investors with tax benefits via its Section 12J model, but also via something called Section 12B. Section 12B of the Income Tax Act allows companies to depreciate investments into renewable technology entirely in the first year.

When looking at both Decentral Energy and Rencell Limited, what’s encouraging is that they offer strong asset underpins in a fast-growing space.

South Africa is facing many challenges with its energy supplies. But there are serious developments afoot that will result in renewable energy becoming more widely adopted as the years go by.