South Africa’s electricity challenges have unlocked private market investments supporting the transition to renewables while earning investors market-leading, risk-adjusted returns. But with the improvement in SA’s electricity performance, the legislation will likely change on 1 March 2025 when it has been set to be reviewed. Investors therefore have limited opportunities to allocate their tax capital and lock in returns for the next 10-20 years according to Westbrooke Alternative Asset Management.
“SA’s electricity challenges forced the government to fast-track its renewable energy transition, with progressive regulatory amendments unlocking opportunities for renewable energy solution providers and investors,” explains Dino Zuccollo, Head of Investor Solutions at Westbrooke Alternative Asset Management.
To incentivise and accelerate the energy transition, National Treasury implemented amendments to the Income Tax Act in 2023 that encouraged taxpayers to invest in renewable energy projects.
The subsequent introduction of Section 12BA in the Income Tax Act built on the incentives contained in Section 12B, and allows taxpayers to deduct 125% of the upfront costs of new renewable energy-generating assets acquired for their trade, provided they came into first-time use between 1 March 2023 and 28 February 2025.
“By incorporating gearing in the offering, Westbrooke has effectively enhanced this tax deduction to 200%, returning a targeted R0.90 for each R1 for individual taxpayers who pay tax at 45%. Thereafter, investors benefit from a de-risked income stream for up to 20 years despite having received almost all of their capital back through the SARS refund,” adds Zuccollo.
The updated legislation also removed the cap on project generation capacity, which made the Section 12BA incentive more appealing, prompting more businesses to invest in renewables. However, faced with so many investment options, investors must consider multiple factors, particularly given the long-term horizon of these private equity investments.
With a proven track record as South Africa’s largest tax-enhanced private market investment manager, with over R4 billion successfully invested in over 100 transactions, and a secured investment pipeline of solar PV projects, Westbrooke offers investors an experienced and de-risked investment option.
Westbrooke selects partners with a proven track record, an established reputation in the sector and who are prepared to invest their own capital in projects alongside investors. Another key performance metric in this process is the underlying credit quality of the off-take agreements in place.
Having assessed the market, Westbrooke is investing capital alongside five strategic partners that install, operate and own small and medium-sized embedded generation solar PV projects through the Westbrooke Renewable Energy Alternatives (REAL) strategy.
“The strategy allows investors to access the much-needed and fast-growing renewable energy sector via a diversified portfolio of solar PV projects underpinned by long-term cash flows secured through power purchase agreements concluded with high-quality end-users,” says Zuccollo.
The FY24 portfolio consists of 45 underlying projects ranging from 129-1000 kilowatt peak (kWp) generation capacity, and battery energy storage solutions up to 700 kilowatt hours (kWh) across the country.
The projects include grid-tied and hybrid systems, and batteries. Off-takers include a diverse base across sectors, including agriculture, commercial, industrial, residential and educational institutions.
“Importantly, strong contractual revenues underpin our projects, generating stable and predictable cash yields over the lock-in period to provide a long-term income stream, which de-risks the investment,” continues Zuccollo.
“These private market investments also offer investors diversification benefits by delivering asymmetric and uncorrelated returns, providing attractive risk-adjusted returns with a capital preservation focus,” he concludes.
Westbrooke REAL will invest a further R500-800m in solar and battery and energy storage solutions projects across SA in the 2025 tax year while the tax incentive remains in effect. Direct investors require a minimum cash investment of R1 million.