Ideas & Debate

VAT exemptions on solar key to universal electrification by 2022


Solar panels. FILE PHOTO | NMG

While Kenya's target for universal electrification is set for 2022, about 18 million people in the country still have no access to electricity or any other modern form of energy, denying them opportunities to improve livelihoods and incomes.

Reinstating the VAT exemptions as proposed in the Finance Bill, 2021 on specialised equipment for solar and wind energy development and production is a most appropriate move that needs to turn on the lights for the underserved communities.

This change is key and will support the increased uptake of solar products as well as supporting the Big Four Agenda (food security, affordable housing, manufacturing, and affordable healthcare).

The Government introduced VAT on energy products in the Finance Act, 2020. Before then, there were sensible VAT exemptions for renewable energy generation equipment. They made Kenya a global role model and enabled it to make significant leaps in ensuring that all its people access essential life-enhancing and livelihood technologies.

Unfortunately, the removal of VAT exemptions in 2020 targeted clean cooking, off-grid solar and all types of mini-grid technologies (wind, hydro, solar) which are the least cost options available for last mile connections. This left the energy sector more vulnerable.

These VAT introductions increased taxes which were passed on to customers in the form of higher prices, making solar products unaffordable to low-income, vulnerable, and off-grid households during an ongoing health and economic crisis.

One cannot ignore the role of off-grid solutions in providing affordable and reliable energy.

Covid-19 has shown how healthcare can benefit from off-grid solutions as a reliable source of energy for cooling vaccines, medicines, and powering life support equipment. These off-grid solutions also create job opportunities for many.

The 2019 national census found that an estimated 70 percent of the households have access to a modern form of energy. About 50.4 percent of the overall population enjoys on-grid electricity while another 19.4 percen use solar.

In the rural areas, access to the national grid is much lower and many more rely on solar for lighting. In the 14 under-served (limited national grid network) counties of Turkana, Marsabit, Samburu, West Pokot, Mandera, Wajir, Garissa, Isiolo, Tana River, Lamu, Kilifi, Kwale, Taita Taveta, and Narok; only about 33 percent of the households have access to a modern form of energy for lighting. This poses the need for a paradigm shift in enhancing connectivity through private sector participation.

This is achievable through minigrids, a renewable energy solution which can stimulate socio economic development.

Minigrids are an off-grid electricity distribution network involving small-scale electricity generation mainly by solar. These networks have a significant and often underestimated role to play in the future mix of access to electricity.

A study by Lighting Global estimated that 420 million people worldwide now use standalone off-grid solar, while the World Bank estimates that another 47 million people rely on mini grids, a nearly tenfold difference.

The proposed reinstatement of the tax exemptions will support the increased uptake of these solar products and significantly contribute towards the achievement of universal access to electricity in the country.

Power Africa, in its 2020 study on the Kenya Off Grid Solar Project (KOSAP) counties estimates that 1.1 million households of the population in the KOSAP target counties, are more than five kilometres from the electricity grid, meaning they are unlikely to be served by grid expansion.

According to the 2021 Kenya Solar Tax Impact study by the Africa Minigrid Developers Association (AMDA), preliminary conclusions from the minigrid sector, interviews with investors reveal a potential for up to two million connections to be served by private minigrids. This will be mainly in counties which are disadvantaged in the provision of other types of infrastructure.

Investors have shared that the profit margins in the sector are set to benefit from the new exemptions. This will stimulate investment in mini grids, solar stand-alone home systems, and in wind technologies.

The 2021 Finance Bill reintroduces the opportunity for private minigrid developers to electrify the underserved counties and serve the most vulnerable and marginalised people.

The proposed VAT exemptions will facilitate creation of employment through an increased number of potential businesses.

The recent economic impact assessment conducted by GOGLA, the global association for the off-grid solar energy industry and Kenya Renewable Energy Association revealed that the government would gain $46 million in taxes per year from 250,000 households starting new businesses and an additional $ 2.7 million from 2,500 new jobs per year from income tax.

The year 2020 was certainly a dark year because of the worldwide pandemic which hit Kenya hard. But with the proposed reintroduction of VAT exemptions, 2021 looks set to be a year of light for all Kenyans particularly in the rural areas served by minigrids.

The writer is the Kenya Advocacy Project Manager, Africa Minigrid Developers Association.