The recent VAT exemptions reinstated by the Finance Act, 2021 on solar and wind generation equipment comes at a paramount time. The negative effects of the tax on solar products last year included a surge in price of 10-24 per cent making the previously affordable off-grid energy access solutions unaffordable to millions of rural Kenyan households.
Affordable universal access to clean energy is not only a basic right but a catalyst for job creation and sustainable livelihoods. The latest developments bring Kenya a step closer in her continued efforts towards improving access to electricity for an estimated 16 million Kenyans off the grid.
The 2019 census reported solar lighting in Kenya averaging at 19.3 per cent, with rural areas recording above average rates of connectivity of 29.9 per cent, higher than the rural national grid connections that stood at 26 per cent.
Included in this census are the more than one million homes that are located more than five kilometres from the national grid, hence, reliance on off-grid solutions.
The imposed 14 per cent VAT in 2020 on solar products resulted in job losses in the thousands due to a sharp decline in demand based on un-affordability; eroding away the great strides Kenya had made in universal electrification.
This progressive legislation comes at an imperative period seeing the government's efforts lauded globally for achieving an electrification pace ahead of its population growth, denoting an increase of 5.6 per cent electricity access in the last decade.
The Energy Progress Report of 2021 ranked Kenya at the top of the list globally of nations reducing households without access to electricity. Reiterating Kenya’s commitment to rural electrification benefitting vulnerable and marginalised communities through an array of programmes including the Last Mile Connectivity Programme and ensuring a conducive investment environment for off-grid operators.
The reinstated VAT exemptions serve as particularly good news for frontier and marginalised counties with limited national grid network such as Turkana, Marsabit, Samburu, West Pokot, Mandera, Wajir, Garissa, Isiolo, Tana River, Lamu, Kilifi, Kwale, Taita Taveta, and Narok. A third of the households in these counties utilise modern lighting methods–predominantly solar.
Price reductions as a result of the VAT exemptions are expected to further increase access to solar and renewable energy products for home owners, small and medium-sized enterprises and Kenya’s prevalent informal service sector—jua kali.
Furthermore, the progressive legislation is bound to further promote increased investment for large solar projects to be delivered using mini-grids and solar home systems. The 2021 Kenya Solar Tax Impact study by the Africa Mini-grid Developers Association indicated a potential to connect up to two million homes using mini-grids in 2020.
On average it costs a home Sh35,000, equivalent to approximately $350, for a single phase connection by the Kenya Power and Lighting Company. Decentralised off-grid solutions such as solar home systems and mini-grids, provide critical services to off-grid Kenyan communities that still regard grid electricity to be too expensive.
Solar home kit solutions offered by off-grid players provide off-grid communities with smart, affordable and clean energy solutions for as low as Sh890 monthly. The impact of the discriminatory tax in 2020 witnessed a loss of more than Sh4.5 billion in tax revenues as opposed to the Sh2 billion tax generated from its imposition.
To further reap benefits, the government should prioritise providing incentives for local manufacturing of solar panels and batteries. This will enable the growth of the energy industry value chain, including skills transfer, increased local manufacturing capability and employment.
This sits on the onset of the existing and growing demand for solar products in the region, with local manufacturers and assemblers catering to the Kenya, Uganda, Rwanda, DRC and Tanzania markets. The incentivised local manufacturing of these products will rid the country of over-reliance on Chinese renewable energy imports, which come under sharp scrutiny of their quality and durability.
Lastly for Kenya and the region to have a thriving renewable energy sector there must be stable policies, procedures and plans that are not subject to legislative change frequently. The uncertainty in policy direction hinders off-grid solution providers from operating at their highest output capacity.
The reenacted changes therefore provide millions of homes in Kenya and the region with a chance to achieve universal energy access.
Award-winning oil and energy expert serving on numerous international boards and advisories
