FULL REPORT: South Africa – Tax incentives for renewable energy projects in 2023 budget will moderately boost investment in power sector in next year

Torchlight Predictions

• Government will expedite efforts to privatise Eskom, but move will not improve power generation or transmission in coming months
• Government will retain COVID-19 social grant beyond March 2024, despite fiscal consolidation efforts
• Planned protests by trade unions from 6 March will disrupt business operations in major cities of Pretoria, Johannesburg and Durban

Developments

• Finance Minister Enoch Godongwana presents the 2023 budget, which includes debt relief of nearly USD 14 billion to Eskom over the next three years, on the condition that it cedes some of its power stations to private sector partners. He also announced plans to extend the coronavirus (COVID-19) social relief of disaster grant until 31 March 2024, and reiterated calls for the need to balance fiscal consolidation and recruit additional government workers. (22 February)

Insights

The decision to bail out Eskom on the condition it cedes some of its power stations to private investors indicates the government will intensify efforts to unbundle and liberalise the entity in the coming months. Eskom will no longer be allowed to take on additional debt and will only be allowed to spend money on the maintenance of existing power plants. However, this is unlikely to improve power generation in the coming months due to systemic corruption and dilapidated coal plants. Efforts to privatise Eskom will also be met with severe resistance from sections of the government and some trade unions.

Similar reluctance will also undermine efforts to attract investment in and improve the transmission sub-sector, where the public enterprises and energy ministries want to maintain Eskom’s monopoly. Godongwana intends debt relief to Eskom will allow it to invest more in transmission and distribution networks, as well as relaxing legislation around public-private partnerships in these areas, but these will likely be beset by many of the challenges constraining power generation. 

The decision to retain the COVID-19 social grant is an attempt to prevent a further decline in support for the ruling African National Congress ahead of general elections in mid-2024. The grant, which was launched in 2020 to support poor households during the pandemic, has helped 18.6 million low-income households cope with rising living costs and unemployment. Despite fiscal consolidation efforts, the government will also likely extend the grant beyond March 2024.  

The impasse over salary negotiations between the government and eight public sector unions representing 1.3 million workers will continue in the coming months. Wage negotiations in the last six months have failed to resolve the deadlock as unions rejected two government proposals for salary increases of 3% and 4.7%, and they continue to demand a 10% increase. The government will however continue to reject this demand, especially with inflation having declined in recent months. The dispute will affect service delivery, particularly in local municipalities as workers continue to strike, leading to protests by local communities. 

Implications for Business

Business and financial: The tax incentive for households and businesses which invest in green energy will moderately boost investment in the sector. Under the directive, companies can claim a one-year 125% deduction for all renewable energy projects brought online by February 2025, with no threshold on generation capacity. However, implementing supporting legislation for renewable energy projects will likely progress slowly in the coming months due to stakeholder resistance. Investment will be further deterred by the Financial Action Task Force decision on 24 February to greylist South Africa, which will increase legal, operational and reputational risks for foreign companies.  

Unrest: Trade unions representing public sector workers have announced plans to embark on an indefinite strike from 6 March until the government agrees to its salary demands. Planned demonstrations will attract between 100 to 1,000 people, particularly in the major cities of Pretoria, Cape Town, Durban and Johannesburg, and will last for several weeks. They will disrupt business operations, particularly along major roads and around government offices, which will be blockaded and vandalised.

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