Analysis by Jason Wallis, Finance Director at Namene Solar
Changes to VAT and import tariffs for solar materials and equipment could jeopardise regional progress towards energy access and environmental targets.
Namene Solar is celebrating the synergy of our brands. We have unified our branches that extend into both the off-grid and commercial and industrial space. This, combined with our Nairobi-based and international team, gives us a unique, aerial view of the sector
Yet this exciting company announcement comes at the same time as a considerable blow to the sector in Kenya, solar’s powerhouse in East Africa.
As of July 1st, all solar materials and equipment are now subject to 14% VAT, as laid out by the Kenyan Revenue Authority’s latest finance bill. Amendments to the East African Community legislation also mean that solar lanterns — which were previously exempt from import duties — are now subject to 25% import duty.
How will this impact solar in East Africa?
These decisions to increase import taxes on solar lanterns, and charge VAT on all solar supplies, is likely to impact the region significantly.
While sourcing, installing and maintaining systems will not be directly affected by the increase in import tariffs, they will become more expensive as a result of the cashflow implications of VAT. Faced with this higher cash requirement, customers may be discouraged from investing in solar.
Providers of fully financed solar solutions will have to fund this negative cash position. In turn, this will be absorbed into the pricing. Ultimately this will impact the affordability of solar projects for customers, and jeopardise their long-term financial benefits and carbon savings.
The hardest hit will be off-grid solar customers in rural areas, many of whom can just afford to light their homes with a single portable light.
The import tariff increase, coupled with sales VAT, is a double taxation that places these essential lights further out of reach. It’s a step backwards on the path to universal energy access set out by Sustainable Development Goal 7.
The tariff risks exacerbating the COVID health crisis further by jeopardising the progress off-grid solar has made to replace toxic kerosene lamps. These lamps cause air pollution and respiratory disease — both of which have been linked to COVID fatalities.
Kenya is the hub of both off-grid and commercial solar in East Africa. Many companies — Namene Solar included — import solar products to Nairobi before distributing to the wider region. These higher tax rates will have consequences that ripple outwards beyond the border, and affect the surrounding countries that source solar lights, products and parts from Kenya.
Short term, solar products will be more expensive, compromising affordability across the region. This is likely to last until companies make the necessary long term amendments to their supply and distribution chains, potentially relocating their East African hub outside of Kenya.
The bigger economic picture
Governments make certain products and services immune from import tariffs and VAT, to stimulate the uptake of any given industry. The motivation for this stimulus is usually for one of two reasons. Either for strategic industries of public interest, or to support an industry until it’s well-established and able to absorb these taxes, in turn boosting government tax revenues.
Solar falls into both of these categories, as a strategic industry of public interest, and a nascent industry that is still establishing itself in global markets. As such, it has benefitted from the vital support this VAT and import tariff immunity brings.
The sector has experienced increasing employment and growing availability of products and services. But it has not yet reached a level of maturity as an industry.
By no longer exempting solar from VAT and subjecting solar lanterns to import tariffs, Kenya is risking solar sales and threatening companies’ profitability. In turn this could see the reallocation of solar products and services to other regions, or result in companies collapsing, leading to a downturn in revenue collected in taxes.
Historically, Kenya has created a favourable environment for solar, implementing supportive policies that allowed the industry to thrive and for the country to become revered as the solar hub of East Africa. This sudden pivot to a policy landscape suited for a more mature industry may have unintended outcomes, such as rising unemployment in the — until now — flourishing solar industry.
From an economic viewpoint, increasing taxes as an industry matures is completely rational to bring much needed income to the state. However, this move is premature for solar — which is still an emerging industry in East Africa. Kenya has a chance to anchor itself as the solar capital of East Africa, a position it may lose as a result of these new VAT and import tariff rates.
But there is more to this decision than purely economic factors. The second driver of tax waivers, a wider public interest, has to be considered alongside the economic viewpoint. It is irrefutable that the adoption of solar energy remains in the public interest.
Not only is Kenya, like all other governments worldwide, striving to hit carbon cutting targets, but it is seeking to attract multinational companies to use the country as its African hub of operations. An environment where reliable, clean energy adoption is strongly encouraged will be viewed favourably by such companies operating at the forefront of the fight against climate change.
Kenyan businesses have the ability to be global leaders in the climate fight by powering their ventures with solar. Meanwhile, millions of Kenyans still live without access to modern power, resorting to fossil fuel based lighting. Solar lighting products offer a sustainable route out of poverty, through economic savings, better health, increased productivity and better conditions for education. These tax changes jeopardise this opportunity that millions urgently need.
Which leads back to the economic considerations. Sustainable growth, supported by a favourable economic environment in Kenya will only increase the country’s economic output and boost future tax revenue for the government.
A critical moment for solar
The import duty increase comes at critical moment for the solar industry. The convergence of the climate emergency and the COVID emergency has made access to affordable, clean energy a matter of absolute urgency.
Energy services are key to providing essential healthcare. From powering medical facilities, to keeping communications and IT services functioning to connect people while socially distancing. As such, solar energy has been recognised as an essential service by a number of governments globally, and there is increasing support for upscaling deployment in the wake of the COVID crisis.
The decision to increase import taxes and VAT at this critical moment for the industry is a misstep that risks public health, and the businesses and facilities that rely on solar to power their essential operations.
Despite this unfortunate decision, demand for energy will not subside. It is perhaps more vital now than ever, for the millions who depend on solar, and the further 789 million globally who have yet to access modern electricity.
The brand fusion of our scalable solar installations and off-grid lighting products has renewed Namene Solar’s commitment to sustainable, clean energy wherever light and power is needed.
Along with our industry peers and partners, we intend to ensure solar energy is not only accessible, but remains affordable for our customers in the wider East Africa region, and globally.
Original article can be read here