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Electricity sector association of kenya

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The finance bill (2020) and effects on the electrcity sector  


George Aluru
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(@galuru)
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The COVID 19 situation in Kenya has led to the country experiencing economic challenges as various sectors of the economy have had to shut down or reduce their activities to a minimum. The Kenyan Government has in this period also actively sort to introduce legislation that would see it secure revenues to meet its obligations. This has seen the introduction of the tax laws (amendment) Act and the Finance bill 2020. While there is a need to raise revenues, such need should not result in punitive measures for industry.

The electricity sector, of which Renewable Energy (RE) supplies nearly 95% of the consumed energy, is a vital enabler of the economy, an important cog that will support efforts to revamp the economy post-COVID 19. Since the start of the COVID 19 epidemic the sector has been repeatedly targeted with specific legislative proposals that would adversely affect its success.

The Tax laws (amendment) act introduced 14% VAT on previously exempt supplies imported for construction of power generation plants supplying the national grid and on supplies for geothermal prospecting equipment. A compensating tax of 30% was further introduced for power generation companies. The Act also reduced the investment deduction allowances on capital costs to 50% from either 100% or 150% further reducing the viability of power projects with multibillion-shilling capital costs.

Members of parliament when debating the tax laws (amendment) bill noted the importance of clean energy in Kenya’s present and future and unequivocally rejected taxation measures specifically directed at solar, wind and batteries. It is disheartening to note that the same measures that had been rejected had been reintroduced in the Finance bill as the government looks to raise more revenue by taxation. The introduction of 14% VAT on equipment for solar and wind power development as proposed together with previous new measures passed under the tax laws amendment act are estimated to lead to an increase in generation tariff of at least 7.5% as the capital costs of solar and wind projects will immediately rise by 14%. This will directly translate to more costly power to the consumer and discourage investments in such powerplants. The bill also brings back the rejected introduction of 14% VAT on raw materials for batteries for manufacturers of solar batteries. Solar and associated batteries have become crucial in power supply to the rural and urban underprivileged, to industries looking to save on their power costs and recently to project developers on the grid that have been developing largescale solar plus battery powerplants that improve the quality of electricity supply from solar. Introduction of taxation on raw materials for batteries will only work to make them even more expensive at a time when the industry is in concerted efforts to reduce costs and encourage uptake. The bill further proposes to also introduce Import declaration fee of 3.5% for projects under the special economic framework will further increase the costs of Power projects.

The long timelines experienced in licensing and land acquisition for projects already make the investment costs in Kenya comparatively higher. Additionally, EPRA has in the past years made reductions of 40% on the Feed-in-Tariffs, further limiting returns. The efforts of investors to improve the stability of the Kenyan grid by implementing battery storage solutions will also be hampered by the introduction of specific taxation measures on deep-cycle and their raw materials batteries for solar as proposed. Adoption of the above measures would severely strain an industry that is already struggling.

These disincentives threaten to roll back years of tireless joint Public-Private efforts to improve the investment environment in the electricity sector.  These crucial incentives came from the acknowledgement by Government and other stakeholders of the need to manage the high capital costs and high risks associated with RE projects and the importance of encouraging development of sustainable energy sources. Kenya was then struggling with expensive and insufficient electricity supply. The success of the now threatened incentives has seen great strides made in RE development in Kenya leading to international recognition. The disincentives reintroduced under the Finance Bill 2020 will lead to a decline in investor confidence, and ease of doing business, and may also result in closures, job losses and capital flight. These proposals if adopted would additionally open complex and troublesome legal proceedings as investors seek contractual redress for loss of income due to adverse and abrupt change in tax laws for such long-term investments.

We request that the assembly again rejects these amendments as done by the finance committee in April. 

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