Renewable energy and the 12L energy efficiency tax incentive
As an end-of-year bonus to the energy efficiency industry the long awaited “Regulations in terms of Section 12L of the Income Tax Act, 1962, on the allowance for energy efficiency savings” was promulgated and came into operation on 1 November 2013.
The allowance is for the purpose of determining the taxable income derived by any person from carrying on any trade in respect of any year of assessment ending before 1 January 2020. It stipulates that there must be allowed as a deduction from the income of that person an amount in respect of energy efficiency savings by that person in respect of that year of assessment.
Since the promulgation 12L has raised many questions due to the unknown territory our country is embarking on which is opening up new markets to stimulate energy efficiency. Only through participation and involvement will the market evolve and grow towards solid structures and processes that can support future similar incentives.
One of the most pertinent questions asked is:
“Is renewables to be, or not to be allowed as part of the 12L energy efficiency tax incentive?”
The answer should quite logically be: Energy efficiency = demand side; renewable energy = generation side, therefore not part of energy efficiency, but part of alternative ways of generating energy – which by the way should also be used efficiently, like all energy resources.
12L is an incentive for using the energy which is generated from sources that are harmful to the climate more efficiently. However, renewables probably deserve such an incentive in its own right, but it is excluded from Section 12L.
Regulation 6 excludes renewables
Regulation 6 of 12 L depicts that a person may not receive the allowance “in respect of energy generated from renewable sources or co-generation, which means energy from waste and combined heat and power, other than energy generated from waste heat recovery”. The renewable sources excluded are listed as biomass, geothermal, hydro, ocean currents, solar, tidal waves or wind. Waste heat recovery is defined as “utilising waste heat or underutilised energy generated during an industrial process”. Therefore only energy generated using waste heat recovery will be considered.
One exception to the rule for renewables
But 12L does make an exception through the inclusion of Captive Power Plants which encourages self-generation on a large scale. Generating energy for your own use is seen as a Captive Power Plant and an allowance can only be claimed should the “kWh or the equivalent kWh of energy output of the captive power plant” i.r.o. an assessment year is “more than 35% of the kWhs or the equivalent kWhs of energy input in respect of that year of assessment”.
The definition in the Regulation stipulates that “A captive power plant means where generation of energy takes place for the purposes of the use of that energy solely by the person generating that energy”. This is interpreted as the self-generated energy, albeit from whichever source, is not being fed into the grid, but used within the reticulation system of the respective project or plant for which the energy efficiency allowance is being claimed. It is an incentive to up the implementation of self-generation in excess of 35% of the requirements of a project or plant.
So in effect renewable energy that is generated for own use and which constitutes in excess of 35% of the kWhs of energy input in the year of claiming, will be allowed. Clarifying the matter, Barry Bredenkamp, Senior Manager: Energy Efficiency at SANEDI said “Captive Power Plants is the ONE exception to the rule where RE technology may be used”.
SANEDI is the body that evaluates energy savings reports and issues tax certificates to organisations for submission to SARS to claim section 12i and 12L tax incentives and invites organisations to pursue the energy efficiency tax incentive. Follow these steps to make use of the 12L incentive:
1) Appoint a Measurement & Verification Professional, from a SANAS accredited M&V Inspection Body, to compile a report containing a computation of the energy efficiency savings in respect of that person for that year of assessment. Inspection bodies are listed on the SANAS website.
2) Register with SANEDI for energy efficiency tax allowance claims at www.saneditax.org.za
3) Submit the M&V Professional’s report to SANEDI.
4) SANEDI will furnish you with the approval for continuance.
On the successful completion of the tax allowance approval process SANEDI will issue a formal energy savings certificate. The certificate is then submitted to the South African Revenue Service (SARS) together with the claim for the tax allowance as part of the customary tax returns.
The systems in place have been used over the last 4 years for the 12i tax incentive, and already over 60 projects are registered for 12L and being processed.
The Energy Training Foundation (EnTF) has been training and Certifying Measurement and Verification Professionals (CMVPs) according to EVO and IPMVP under the licence of the Association of Energy Engineers (AEE) in South Africa for the past 8 years. It has provided the skills required to develop the local energy efficiency incentive industry where accurate, transparent and credible substantiation of energy savings claims can be validated through international best-practice measurement and verification.
For more information on the 12L visit www.saneditax.org.za
For more information on training as a CMVP visit www.energytrainingfoundation.co.za
As an end-of-year bonus to the energy efficiency industry the long awaited “Regulations in terms of Section 12L of the Income Tax Act, 1962, on the allowance for energy efficiency savings” was promulgated and came into operation on 1 November 2013.
The allowance is for the purpose of determining the taxable income derived by any person from carrying on any trade in respect of any year of assessment ending before 1 January 2020. It stipulates that there must be allowed as a deduction from the income of that person an amount in respect of energy efficiency savings by that person in respect of that year of assessment.
Since the promulgation 12L has raised many questions due to the unknown territory our country is embarking on which is opening up new markets to stimulate energy efficiency. Only through participation and involvement will the market evolve and grow towards solid structures and processes that can support future similar incentives.
One of the most pertinent questions asked is:
“Is renewables to be, or not to be allowed as part of the 12L energy efficiency tax incentive?”
The answer should quite logically be: Energy efficiency = demand side; renewable energy = generation side, therefore not part of energy efficiency, but part of alternative ways of generating energy – which by the way should also be used efficiently, like all energy resources.
12L is an incentive for using the energy which is generated from sources that are harmful to the climate more efficiently. However, renewables probably deserve such an incentive in its own right, but it is excluded from Section 12L.
Regulation 6 excludes renewables
Regulation 6 of 12 L depicts that a person may not receive the allowance “in respect of energy generated from renewable sources or co-generation, which means energy from waste and combined heat and power, other than energy generated from waste heat recovery”. The renewable sources excluded are listed as biomass, geothermal, hydro, ocean currents, solar, tidal waves or wind. Waste heat recovery is defined as “utilising waste heat or underutilised energy generated during an industrial process”. Therefore only energy generated using waste heat recovery will be considered.
One exception to the rule for renewables
But 12L does make an exception through the inclusion of Captive Power Plants which encourages self-generation on a large scale. Generating energy for your own use is seen as a Captive Power Plant and an allowance can only be claimed should the “kWh or the equivalent kWh of energy output of the captive power plant” i.r.o. an assessment year is “more than 35% of the kWhs or the equivalent kWhs of energy input in respect of that year of assessment”.
The definition in the Regulation stipulates that “A captive power plant means where generation of energy takes place for the purposes of the use of that energy solely by the person generating that energy”. This is interpreted as the self-generated energy, albeit from whichever source, is not being fed into the grid, but used within the reticulation system of the respective project or plant for which the energy efficiency allowance is being claimed. It is an incentive to up the implementation of self-generation in excess of 35% of the requirements of a project or plant.
So in effect renewable energy that is generated for own use and which constitutes in excess of 35% of the kWhs of energy input in the year of claiming, will be allowed. Clarifying the matter, Barry Bredenkamp, Senior Manager: Energy Efficiency at SANEDI said “Captive Power Plants is the ONE exception to the rule where RE technology may be used”.
SANEDI is the body that evaluates energy savings reports and issues tax certificates to organisations for submission to SARS to claim section 12i and 12L tax incentives and invites organisations to pursue the energy efficiency tax incentive. Follow these steps to make use of the 12L incentive:
1) Appoint a Measurement & Verification Professional, from a SANAS accredited M&V Inspection Body, to compile a report containing a computation of the energy efficiency savings in respect of that person for that year of assessment. Inspection bodies are listed on the SANAS website.
2) Register with SANEDI for energy efficiency tax allowance claims at www.saneditax.org.za
3) Submit the M&V Professional’s report to SANEDI.
4) SANEDI will furnish you with the approval for continuance.
On the successful completion of the tax allowance approval process SANEDI will issue a formal energy savings certificate. The certificate is then submitted to the South African Revenue Service (SARS) together with the claim for the tax allowance as part of the customary tax returns.
The systems in place have been used over the last 4 years for the 12i tax incentive, and already over 60 projects are registered for 12L and being processed.
The Energy Training Foundation (EnTF) has been training and Certifying Measurement and Verification Professionals (CMVPs) according to EVO and IPMVP under the licence of the Association of Energy Engineers (AEE) in South Africa for the past 8 years. It has provided the skills required to develop the local energy efficiency incentive industry where accurate, transparent and credible substantiation of energy savings claims can be validated through international best-practice measurement and verification.
For more information on the 12L visit www.saneditax.org.za
For more information on training as a CMVP visit www.energytrainingfoundation.co.za
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