Ideas & discussion
VAT exemption for solar keys for universal electrification until 2022
Tuesday, June 15, 2021
While Kenya's 2022 goal is universal electrification, around 18 million people in the country still lack access to electricity or other modern forms of energy, denying them the opportunity to improve their livelihoods and incomes.
The reintroduction of the VAT exemptions proposed in the Finance Act 2021 for special equipment for the development and production of solar and wind energy is a highly appropriate step that must turn on the lights for the underserved communities.
This change is critical and will support the expansion of solar products as well as the Big Four agenda (food security, affordable housing, manufacturing and affordable health care).
With the Finance Act 2020, the government introduced VAT on energy products. Before that, there were reasonable VAT exemptions for plants for the generation of renewable energies. They made Kenya a global role model and enabled significant strides to be made to ensure that all of its people have access to vital technologies and livelihoods.
Unfortunately, the removal of VAT exemptions in 2020 targeted clean cooking, off-grid solar and all kinds of mini-grid technologies (wind, hydropower, solar) which are the most cost-effective options for last mile connectivity. This made the energy sector more vulnerable.
This VAT introduction increased taxes, which were passed on to customers in the form of higher prices, making solar products unaffordable for low-income, vulnerable, and off-grid households during an ongoing health and economic crisis.
The role of off-grid solutions in providing affordable and reliable energy cannot be ignored.
Covid-19 has shown how the healthcare sector can benefit from off-grid solutions as a reliable source of energy for cooling vaccines, medicines and powering life support devices. These off-grid solutions also create employment opportunities for many.
The 2019 census found that an estimated 70 percent of households have access to a modern form of energy. Around 50.4 percent of the total population use grid-connected electricity, another 19.4 percent use solar energy.
In rural areas, access to the national electricity grid is much lower and many more rely on solar energy for lighting. In the 14 underserved (limited national networks) counties Turkana, Marsabit, Samburu, West Pokot, Mandera, Wajir, Garissa, Isiolo, Tana River, Lamu, Kilifi, Kwale, Taita Taveta and Narok; only around 33 percent of households have access to a modern form of energy for lighting. This requires a paradigm shift in improving connectivity through private sector involvement.
This can be achieved through minigrids, a renewable energy solution that can boost socio-economic development.
Minigrids are an off-grid power distribution network in which small-scale power generation is mainly done by solar energy. These networks play an important and often underestimated role in future access to electricity.
A study by Lighting Global estimates that 420 million people around the world now use stand-alone off-grid solar energy, while the World Bank estimates that another 47 million people rely on mini-grids, an almost tenfold difference.
The proposed reintroduction of tax exemptions will support the increased diffusion of these solar products and make a significant contribution to achieving universal access to electricity in the country.
Power Africa estimates in its 2020 study of the Kenya Off Grid Solar Project (KOSAP) counties that 1.1 million households of the population in the KOSAP target countries are more than five kilometers away from the power grid, which means that they are unlikely to be of network expansion.
According to the Africa Minigrid Developers Association (AMDA) ‘s Kenya Solar Tax Impact Study 2021, preliminary conclusions from the minigrid sector, interviews with investors show a potential for up to two million connections that can be served by private minigrids. This will especially be the case in counties that are disadvantaged in providing other types of infrastructure.
Investors said the sector's profit margins will benefit from the new exemptions. This will stimulate investments in mini-grids, stand-alone solar home systems and in wind technologies.
The 2021 Finance Act will once again offer private minigrid developers the opportunity to electrify the underserved counties and serve the most vulnerable and marginalized people.
The proposed VAT exemptions will facilitate job creation by a larger number of potential businesses.
The recent economic impact assessment carried out by GOGLA, the global association for the off-grid solar energy industry, and the Kenya Renewable Energy Association found that the government of 250,000 households starting new businesses would receive $ 46 million in taxes annually and an additional $ 2.7 million $ 2,500 new jobs a year through income tax.
2020 was certainly a dark year due to the global pandemic that hit Kenya hard. But with the proposed reintroduction of VAT exemptions, 2021 appears to be a year of light for all Kenyans, especially in the rural areas served by minigrids.
The author is the Kenya Advocacy Project Manager of the Africa Minigrid Developers Association.