South Africa Launches Green Energy Fund to Promote Tax-Deductible Investments

South Africa’s first private equity fund which enables green energy investors to qualify for tax deductions approved by the South African Revenue Service (SARS) was recently launched. The fund, named Twelve B Green Energy Fund, has a mandate of financing solar panels, batteries, and inverters for residential as well as commercial and industrial (C&I) areas.

Section 12B of the SA’s Income Tax Act allows for a tax deduction for certain movable assets used for renewable electricity generation. Also, the tax incentive provided in Section 12J provides South Africans to invest in local companies and receive a tax deduction of up to 100%.

Twelve B Green Energy Fund is managed and administered by Grovest, a venture capital firm that pioneered bringing the Section 12J fund to the market. The entity has around R3.5 billion in assets under administration. The green energy fund is regulated by Financial Sector Conduct Authority (FSCA).

Twelve B fund’s portfolio of assets is spread over multiple solar projects in several locations with different end-users. The projects are managed under long-term power purchase agreements (PPAs), which regulate the amount of energy production at an agreed price over the agreement terms.

Jeff Miller, the green energy fund founder, says the fund provides green energy investors with up to 100% tax relief on their assets producing electricity in the year. It is targeting an internal rate of return (IRR) to investors of around 14-15% net of fees and taxes.

The tax-efficient partnership structure of the Twelve B Green Energy Fund benefits the investors to receive bi-annual distributions from the profits of the partnership. There is no prescribed period to hold the assets to get benefits from Section 12B allowance, although the term of the fund is 10 years.

The minimum investment amount for getting the benefits is ZAR100,000 (~ USD 5,600). The 12B provides a working example of its fund by noting that an investor putting a certain amount into a solar kit in March and starting generating electricity in May, will be able to deduct the full amount from their taxable income for the financial year to end February 2024.

In another case, an investor putting a portion of its total investment on a solar kit in March, which starts producing energy in the year ended February 2024, can deduct that amount from their taxable income for that financial year. The balance amount will be deducted from taxable income in the 2025 tax year when the balance of the solar energy system comes into operation.