Power companies operating mini-grids to get tax refunds
By Dominic Omondi | January 14th 2022
Companies or individuals interested in developing mini-grids to sell power to surrounding communities can now enjoy a 150 per cent tax rebate on their investments.
This is after the final changes to the Finance Act 2021, including removing the requirement that electricity from mini-grids must be supplied to the national grid to benefit from tax incentives on the equipment used, took effect this month.
An investor who incurs capital expenditure on building or machinery used for manufacture is entitled to an investment deduction equal to 100 per cent of the expenses.
The deduction increases to 150 per cent - meaning that the investor is allowed to add another 50 per cent of the cost incurred - if the building or machinery exceeds Sh200 million and is outside of Nairobi.
This comes at a time when Kenyans are grappling with intermittent power outages, inflaming an outcry against players in the power supply chain.
Initially, the prerequisite for mini-grid developers to enjoy tax incentives on their machinery was for them to supply the country’s sole power distributor Kenya Power.
Project Manager at Energy4Impact Maurice Onzere noted that one of the challenges is the high cost of putting up mini-grids, and the tax relief will, therefore, go a long way in attracting investments into the sector.
“A mini-grid is a high investment. And given that they will be given this tax relief or tax incentives, it means that people will be more willing to commit their capital into the production of mini-grids,” said Mr Onzere.
But Samuel Mwaura, a partner in charge of taxation services at Grant Thornton, an audit company, does not see the incentives having a big effect, at least not during an election year.
“You will not see a lot of activities this year because of elections,” said Mr Mwaura. He added that the biggest headache for mini-grid developers is the number of approvals involved.
Setting up a mini-grid with an installed capacity of up to one megawatt will be required to apply to the Energy and Petroleum Regulatory Authority (Epra) for a mini-grid construction permit to allow the developer to acquire wayleaves and carry out the design and construction on top of a license to operate the generation and distribution infrastructure.
In Kenya, mini-grids were first developed by the Government in the 1980s to supply administrative centres that were far from the main grid. Such towns included Lodwar, Mandera and Marsabit. The initial mini-grids were mostly powered by diesel generators.
In 2013, the Commission on Revenue Authority identified 14 counties in the north and northeastern parts of Kenya as underserved areas, which can be served by mini-grids, said the World Bank in a 2017 report.
The global lender noted the Kenya Off-Grid Solar Access Project (KOSAP) provides a loan of US$150 million (Sh17 billion) as part of the National Electrification Strategy (NES) KOSAP which aims to replace kerosene, diesel, dry cell batteries, and other alternative fuels with solar technologies in those counties.
Mr Onzere said the incentives are critical for the country’s transition into clean energy, and will also translate into more businesses, especially in remote areas and women empowerment. “There will be growth of micro-enterprises around the mini-grid,” said Onzere.
A solar mini-grid, for example, needs several solar mini-grids. You also need inverters to convert the direct current into an alternative current for transmission and storage, around 12 batteries for a mini-grid.
Also, one of the biggest challenges for mini-grid developers is the acquisition of land and wayleave.
“You know what land means to our community,” said Onzere, noting that it especially challenging in remote areas where land is not adjudicated
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