What new taxation means for renewable energy in Kenya
Kenya’s renewable energy landscape has witnessed increased transformation over the years, largely driven by favorable government policy that is shifting towards the provision of affordable, reliable and sustainable energy.
This has been informed by a number of factors key among them the need to reach the energy poor sections of the society, such as off-grid rural communities and the urban poor whose lives and livelihoods are negatively affected as a result of low consumption of renewable energy, coupled with the use of energy from dirty and polluting sources such as firewood and kerosene. A second key factor is the need to protect the environment by reducing Carbon emissions as per the government’s commitment under the Paris Agreement which seeks to accelerate global efforts towards reducing greenhouse gas emissions as a means of combating climate change.
As a country, we have also been compelled to diversify our sources of energy while transitioning to modern sources due to increased population and the government focus on energy intensive sectors including manufacturing, agriculture and urban development. Many rural communities across the country who are often far off the grids, are now making use of energy from solar, wind and other clean sources, thanks to ease of access and affordability of such renewable energy technologies. The use of solar products for lighting, for instance, enables micro enterprises in the rural communities to extend their business hours and increase their economic productivity.
With continued demand for electricity piling more pressure on the national grid, urban dwellers are also increasingly exploring alternative sources in solar energy, which leads to increased savings for households and businesses. In the urban setups, solar energy is used for lighting, heating and for other household and commercial needs such as water heating.
The Kenya Renewable Energy Association projects a 20% annual increase in demand for solar water heating driven by the requirements in the Energy (Solar Water Heating) Regulations 2012. The regulations require all premises within a local authority with hot water needs in excess of 100 liters per day to install and make use of solar water heating systems. Coupled with tax exemptions, such moves have spurred the growth of the renewable energy sector.
All the gains that have been harnessed through diversification of energy sources are now threatened by proposals contained in the Finance Bill 2020 which seeks to amend various laws relating to taxation and proposes amendments to the Value Added Tax (VAT) Act 2013 in order to introduce VAT on equipment used for the development and generation of solar and wind energy. Also, on the radar are taxable goods for the assembly, manufacture or repair of clean cookstoves.
While reading the 2020/2021 budget statement in the National Assembly, the Treasury Cabinet Secretary implored legislators to pass the new taxation measures arguing, “whereas these tax incentives are well intended, they have limited the capacity of the Government to fund critical expenditures.” The proposed laws are currently being debated in Parliament and are likely to sail through by 30th June, just before the Government’s new financial begins in July.
If passed, the cost of solar and wind generation, as well as that of cookstoves- another clean energy source- will go through the roof with the likelihood of lowering the uptake of such products. Already, a number of health centres, dispensaries and administrative units in remote areas have solar photovoltaic (PV) systems installed to power their energy needs. Such initiatives are likely to stall.
Removing tax exemptions for solar and wind products as well as cookstoves is also counterproductive at a time when the government has committed under the Energy Act 2019 to support the development of renewable technologies in order to replace fossil fuels. Just last year, it was Kenya’s pride when President Uhuru Kenyatta commissioned Africa’s largest wind power project at Lake Turkana, further cementing Kenya’s position as a global leader in renewable energy. The proposed changes could therefore not have come at a worse time.
As the chorus for the shift to renewable energy sources grows louder, we can only harness the gains so far realized in order to improve on innovation in technology and business to spur competitiveness in the sector. The proposed measures will upset such efforts.
By Ruth Ndegwa