Economy

Mini-grids get tax cut to take on Kenya Power

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Kenya Power technicians replace the wooden posts with the concrete ones along Nyerere Avenue in Mombasa. PHOTO | KEVIN ODIT | NMG

Power producers who sell electricity without going through the national grid have been granted a 50 percent tax allowance, boosting the growth of small-scale plants with the potential to lower bills for customers.

The Finance Act 2021 has from January 1 recognised mini-grid power systems, which distribute electricity as “manufacturers”, giving them the same tax incentives available to large-scale generators who sell to near-monopoly Kenya Power.

The coming to force of this clause of the Finance law will see investors in power mini-grids deduct half of the expenses of the buildings and machinery used to generate electricity from income when calculating corporation taxes.

“It will encourage the growth of small renewable energy power plants, which is an important step towards increasing competition and reducing the cost of electricity,” consultants at KPMG East Africa wrote in an analytical note to clients.

The Kenya Association of Manufacturers (KAM), a lobby, had in the past protested that Income Tax Act only recognises producers of electricity to the national grid as manufacturers.

This had locked out small-sized generators, which are legally allowed to supply to surrounding consumers under the Energy Act 2019, from tax incentives.

The energy sector law has opened up the national grid — power transmission and distribution network — to multiple players, democratising the electricity retail market segment, which has been under the stranglehold of Kenya Power.

Energy Act 2019 allows a person who owns an electric power generator of a capacity of not more than one megawatt to agree with a licensed distributor to operate a net-metering system. The system allows the power generator and retailer to install meters, enabling them to charge homes and businesses connected to the electricity.

“In the net metering, you don’t have to necessarily supply to the national grid. You have a number of consumers who are the ones you supply to. But because you are not supplying to the national grid, you cannot get some allowance,” said KAM’s head of policy and research Job Wanjohi in a past interview.