South Africa scores an own goal through tariff increase

The implementation of a 10% increase in the tariff on equipment used to generate solar power threatens to undo the government’s work in incentivising households and businesses to invest in alternative energy sources.

This was part of the government’s Energy Action Plan (EAP), with private electricity generation intended to mitigate the effects of load-shedding and reduce pressure on Eskom. 

It has been immensely successful, with rooftop solar growing from 1.2 GW in 2020 to 6.1 GW at the end of 2024. 

However, this is still not enough to fully end South Africa’s electricity constraints, with the country needing much more capacity to facilitate faster economic growth. 

This is feedback from the Organisation for Economic Cooperation and Development (OECD) in its most recent economic survey of South Africa. 

The OECD aimed to analyse why South Africa has been plagued by low economic growth over the past decade and how it can be revived. 

A major limiting factor on South Africa’s economy has been sporadic and, in some cases, severe power outages. 

While load-shedding has been significantly reduced since March 2024, the country still does not generate enough excess electricity to drive economic growth. 

Any pickup in economic activity is likely to push the country back into load-shedding, as there is minimal excess supply. 

To help bring load-shedding to an end and facilitate economic growth, the government implemented incentives to encourage private electricity generation. 

This included a 25% rebate on the cost of solar panels and a 125% capital depreciation allowance in the first year of installation. 

The National Treasury has launched the Energy Bounce Back (EBB) Loan Guarantee Scheme to assist small and medium-sized enterprises in financing rooftop installations. 

It aimed to support the installation of up to 1 GW of additional generation capacity by reducing the risk taken by banks providing finance.

The OECD stated that these measures were highly effective in easing access to finance, leading to a surge in private generation and investment. 

This helped ease pressure on Eskom and has made large companies mostly immune to the effects of load-shedding. 

However, it also said these incentives primarily catered to wealthier households and large companies due to the high initial investment costs. 

Furthermore, only tax-paying households and businesses can benefit from these incentives.

Undoing good work

The OECD’s praise for the measures to boost private generation came with a warning that the government risks undoing its good work. 

Recent tariff hikes on certain equipment used in solar generation risk limiting growth in renewable energy and have already increased uncertainty for investors. 

This will translate into less capacity being added to the grid and a reduction in investment, with a subsequent impact on economic growth. 

The government increased tariffs on imported goods to protect domestic manufacturers and boost job creation. 

The International Trade Administration Commission (ITAC) of South Africa introduced a 10% tariff on solar photovoltaic panels, cells, and modules in July 2024, following the recommendations of the Renewable Energy Master Plan.

However, the capacity for local manufacturing to ramp up production is uncertain, not least because of electricity shortages and skill gaps, the OECD said. 

Consequently, tariffs may primarily result in higher costs and supply shortages. To mitigate these risks, a temporary rebate for importers has been issued, conditional on a specific permit allowed by the ITAC. 

However, combining increases in tariffs and rebates for importers may be unnecessarily complex, potentially increasing barriers to the expansion of renewables.

Furthermore, the 10% increase in import tariffs on photovoltaic equipment represents a partial policy reversal, as it follows a reduction in import tariffs on transformers from 100% to 30% in 2023, heightening uncertainty for investors. 

Reducing import tariffs on more equipment could further accelerate renewable power generation and alleviate supply chain issues.

The OECD said that ultimately, trade barriers should be phased out, and investment in private, renewable energy generation should be encouraged. 

It also said that if South Africa wants to boost its local industry, it should consider encouraging local production of solar-generation equipment through funding for research and development, export credits, and tax incentives.