Fiscal policy and regulation can support the development of rural mini-grids through low taxes and import duties, accelerated depreciation, and subsidies.
Mini-grid companies are subject to taxation just like any other company. They generally pay taxes or duties on company profits, on sales of electricity, and on mini-grid components. They can also be subject to other taxes such as value-added tax (VAT), withholding tax and property taxes.
One of the best ways to attract investment into mini-grids is to make mini-grid components exempt from import duties, taxes and fees. This is particularly important for green mini-grids in Africa because nearly all the generation components (PV modules, batteries, wind turbines, diesel generators, hydro turbines etc.) are imported. Further support may also be provided by making components purchased inside the country exempt from VAT (the degree to which this is relevant depends on how the tax return process is organised).
Another good way to attract investment is to make mini-grid electricity sales VAT-exempt. In some cases, mini-grid tariffs per kWh can be 10 times those of the national grid tariff. If we assume a VAT of 20%, then the mini-grid customer’s VAT payment per kWh may be up to double that of the tariff per kWh of the main-grid customer.
Finally, governments may want to consider reducing the tax on mini-grid corporate profits through tax holidays, adjusted depreciation periods or simply reduced tax rates. For international investors, it is also important to allow repatriation of mini-grid profits and not charge taxes on money leaving the country.
Policies and Regulations for Private Sector Renewable Energy Mini-grids