Are unfavorable tax policies delaying Africa’s clean energy takeoff?

The appetite for renewable energy in Africa is growing, according to a World Bank study which reported that over a quarter of a million settlements in Africa favor the deployment of solar minigrids in their communities. However, experts say prohibitive government policies and lack of suitable space to establish the energy systems are delaying their deployment, even as the World Bank reports that 568 million people in sub-Saharan Africa are not connected to electricity. Mark Napier, CEO at FSD Africa, said there is a huge opportunity for Africa in renewable energy, but the tax systems in most countries favor investments in “brown” rather than “green” economies. For instance, he said, about $9 billion is invested in renewable energy systems in Africa, while some $40 billion is invested in fossil fuel subsidies, a situation that gives investors in the “brown” economy better tax breaks. “Economies need to be restructured through the tax system to allow for a level playing field for investors in the green economy. At the moment there is an imbalance between brown and green economies and investors will not put money in projects where they feel there is a material disadvantage giving somebody else a better tax break,” Napier said. This imbalance has trickled down to renewable energy minigrids in most African countries, according to Emmanuel Atamba, the chief executive at APSID Consulting, a Kenyan-based social enterprise. In his country where the government claims over 80% of electricity is generated from renewable energy sources, Kenyans are getting frustrated investing in solar systems due to confusing policies. While there is no clear structure to manage solar technologies in a market where retailers selling the products are not regulated, the lack of guidelines on how to match accessories like a solar charge controller with a solar panel is confusing investors. The government has removed taxes on solar panels but the cost of some nontax-exempt accessories is double what main grid electricity accessories fetch on the market, Atamba said. “Consumers are not given clear information on solar installation and that is why people are scared of being duped into buying fake products. It is a risky investment and when you are investing in solar as a Kenyan it’s like you are on your own,” he said. Donor-supported solar generation is softening these risks, especially among low-income households in rural Kenya, where there is no connectivity to the main grid. In Lake Victoria islands, the fishing community there has for the first time experienced the comfort of solar- and wind-generated electricity, after years of being in the dark, said Kennedy Odhiambo, the regulatory and customer service manager at Renewvia Energy Kenya. According to Odhiambo, at Ndenda island — one of the three beneficiary islands in Kenya — a solar system generating 23.79 kilowatts and a wind turbine generating six kilowatts of energy are powering businesses and lighting homes. He said other Lake Victoria islands in Uganda have installed solar systems, too. “The community never believed there can be a solar plant that can serve them and so it was a kind of a surprise when they started seeing it is operating almost every gadget and appliance. They can now do refrigeration, welding, water purification, bakery and many other business ventures,” Odhiambo said. The United Kingdom’s Foreign, Commonwealth & Development Office and the European Union committed £9.4 million and €5.97 million in grants, respectively, to support the development of minigrid solar systems in Kenya, with the government and Agence Française de Développement, or AFD, as the implementing agencies, according to a press release. Through the Green Mini Grid Facility, the grants aim to give 100,000 Kenyans access to reliable green electricity with 20,000 new connections, where Innovation Energie Développement, a consulting and engineering firm, is the management entity, the document stated. “Mini-grids are the top topic in different African countries because it is a low-cost and quick-to-deploy investment. It empowers people who are less privileged to be powered by the grid,” Muslim Janoowala, the energy program officer at AFD Kenya, said. Minigrids are “electric power generation and distribution systems that provide electricity to just a few customers in a remote settlement or bring power to hundreds of thousands of customers in a town or city,” according to the World Bank market outlook study. It ranks Malawi as one of the top 20 countries without energy access, where 15 million people did not have access to electricity in 2020. There is high demand for minigrids in settlements of 2,500 to 10,000 people, it added. Several nonprofits have stepped in to meet this demand, including SolarAid, which has distributed 431,000 solar lights in rural Malawi since 2006. The organization recently rolled out its “energy-as-a-service” program, Light a Village, aiming to reach the poorest segments of the population, and through which they have equipped 2,500 homes with solar systems since 2021. Sofia Ollvid, the communications director at SolarAid, said the project, which has successfully been rolled out in phases, has just finalized phase 2, which was funded by the Turner Kirk Trust, EDF Energy, and nine other funders with a sum of £340,000. While solar home systems come with batteries to store power, import duties of 15% to 30% on entry-level solar lights posed a challenge for the charity a couple of years back. After lobbying the Malawian authorities, together with stakeholders, import duties were removed last year, facilitating access to basic lighting for the poorest in a country where 85% of the population live without access to electricity. “It's an all-round positive development with an increasing number of countries having preferential taxes and tariffs to encourage the uptake of solar,” said Ollvid, adding that there is potential for the project to be replicated elsewhere across the continent. Rwanda has 2.9 million people newly connected to minigrids, according to the market outlook report. But access to energy is still a big problem for the majority of the population, according to Francine Munyaneza, the chief executive at MUNYAX ECO, a clean energy startup. The fast growth of minigrids is due to a policy-friendly environment, where the government has removed taxes on all solar installations, she said. “In Rwanda, solar panels and accessories are all zero-rated but the market is small because we have fewer people and the country is small. The leadership is making it possible to accelerate access to renewable energy to the neediest people,” Munyaneza said. But in Burundi and the Democratic Republic of Congo where her company has a presence, she finds it challenging to provide renewable energy solutions because the countries have only partially removed duty on solar systems. At the Aga Khan Hospital in Kisumu, western Kenya, a solar system of 230 kilowatts, supported with an AFD grant of about $609,000, has reduced power requirements by 65%, officials at the hospital said. But James Onguru, the project manager at the hospital, said they still have energy challenges because of cloudy weather and limited land to install solar systems. To navigate these challenges, the facility has tried to invest in storage batteries, but they are too expensive because they are not tax-exempt. Also, there is limited space to store them, he said. “Electric cars are being given free charging ports. The same should apply to solar where there should be a tax remission so that you can recover your money when you invest in a renewable energy system,” Onguru said. Textbox: Read more: ► The renewable energy transition advances at COP 28. Will it be inclusive? ► Opinion: Africa’s development needs real energy solutions, not more gas ► Why a major IFC solar initiative failed to scale in Africa