South Africa’s big inverter problem

The government’s disregard for the role of inverters in easing electricity demand is short-sighted and “unintelligible”, say legal experts at Webber Wentzel, who argue that the systems are core and integral to solar generation.
In April, National Treasury and the South African Revenue Service (SARS) published the draft legislative amendments (the Taxation Laws Amendment Bill, 2023) to give effect to the solar tax relief measures announced in the 2023 Budget for public comment.
The introduction of tax breaks for homeowners and businesses is intended to boost investment into renewable energy sources and increase electricity generation in the country. The two tax incentives are:
- A tax rebate of 25% of the installation cost, up to a maximum of R15,000, of rooftop solar panels from 1 March 2023; and
- A tax rebate of 125% of businesses’ cost of investment in renewable energy sources such as solar, hydropower, biomass, and wind.
While these tax breaks have been broadly welcomed, taxpayers have been left wanting for various reasons, Webber Wentzel said.
Inverters have become a key sticking point. While inverters have been explicitly excluded from the rooftop solar tax break, they are included in the renewable energy tax break – creating a fundamental contradiction.
The firm said that a fully functioning solar energy system does not only require the installation of rooftop solar panels; each component – which includes inverters and batteries – is crucial.
“The solar energy tax incentive is restricted to the cost of solar panels only. Inverters and batteries (which power the inverters) are typically just as, or even more, expensive than the solar panels themselves,” the firm said.
However, these systems have been completely disregarded in the rooftop solar tax incentives, and have even been flagged as problematic by power utility Eskom.
Treasury has argued that the rooftop solar energy tax incentive aims to bring more generation capacity online – and inverters and batteries don’t generate energy, they just store it.
“However, any rooftop solar system which feeds into the grid, as supposedly encouraged by the solar energy tax incentive, requires an inverter to convert the direct current (DC) electricity generated by the solar panels to alternating current (AC) electricity – which is what is needed for the energy to be fed back into the national electricity grid,” Webber Wentzel said.
Therefore, an inverter is evidently a crucial part of any solar energy system and is thus fundamental for qualifying for the solar energy tax incentive.
“For inverters to not be covered by the (rooftop) solar energy tax incentive is therefore unintelligible,” the firm said.
According to the legal experts, Treasury has acknowledged as much in the second tax incentive.
“Ironically, while Treasury does not recognise the necessity of inverters and batteries for the purposes of applying the (rooftop) solar energy tax incentive, it confirmed the necessity of these components for the enhanced renewable energy tax incentive,” the firm said.
During a virtual public workshop on the enhanced renewable energy tax incentive, a concern was raised that the wording of section 12BA – which refers to assets “to be used by that taxpayer in the generation of electricity “- does not cover inverters and batteries.
“Treasury said that the use of the word ‘in’ made the provision wider than the actual generation part of the system and thus includes inverters and batteries as a necessary part of the electricity generation system,” the legal experts noted.
“Treasury’s misunderstanding of the workings of an efficient solar energy system and its approach to combatting South Africa’s energy crisis through the application of the solar energy tax incentive is not only disconcerting but also appears short-sighted.”
On top of the Treasury’s dismissal of inverters, Webber Wentzel highlighted other issues – such as the insistence that the rebates only apply to “new and unused” solar panels.
This, the firm said, appears to be a cost-saving tactic on the part of the Treasury to prevent those who bought solar panels on or before 1 March 2023 to take advantage of the tax break. Treasury also admitted that inverters and batteries were excluded from the rebate due to budgetary constraints.
But when considering the magnitude of the energy supply crisis that South Africa is facing, the move to pinch pennies on what could have been a massive boost to new generation and easing demand on the grid comes across as unwise and actually defeats the purpose of the incentive, the legal experts said.
“While the introduction of the solar energy tax incentive constitutes a clear indication by the government of its commitment to tackling the current energy supply crisis…the fiscal conservatism by Treasury may ultimately be its undoing,” it said.