The Twelve B Green Energy Fund – South Africa’s first private equity fund enabling green energy investors to qualify for South African Revenue Service-approved tax deductions – was launched on February 14.

The fund, regulated by the Financial Sector Conduct Authority, has a mandate to invest in solar panels, inverters and batteries in residential complexes, as well as commercial and industrial installations.

Section 12B of the Income Tax Act allows for a tax deduction for certain qualifying assets used for electricity generation from renewable sources.

A similar tax incentive – Section 12J – was launched in 2014, becoming the fastest growing alternative asset class in South Africa, with over R12-billion of capital raised across more than 200 funds.

The Section 12J tax incentive reached its sunset clause in June 2021.

The Twelve B fund, which is also Shariah compliant, is managed and administered by Grovest, the entity involved in bringing Section 12J to market in 2014.

Currently, Grovest is the largest administrator of Section 12J funds, with over R3.5-billion in assets under administration.

Twelve B’s portfolio of assets is spread over several solar projects in different locations and that have different end-users. Each project is governed by a long-term power purchase agreement (PPA), which governs the amount of energy generated at an agreed price over the term of the PPA.

All Twelve B fund projects are vetted by an experienced investment committee before they are approved.

Twelve B Green Energy Fund founder Jeff Miller is leading the Section 12B initiative, drawing on his experience as pioneer of Section 12J venture capital companies which offered attractive investment propositions and tax deductions.

He says green energy has become a necessity because of South Africa’s unreliable electricity supply. “The private sector needs to step in to urgently improve the situation.”

In addition to the longer-term benefits of sustainable energy generation, Miller says the Twelve B Green Energy Fund is an attractive initiative. “South African individuals, trusts, companies and pension funds can write off 100% of their investment against their taxable income in the year the assets produce electricity.”

Effectively, he says, this could provide green energy investors with up to 100% tax relief in that year.

“The Twelve B Green Energy Fund is targeting an internal rate of return to investors of [between] 14% to 15% net of fees and taxes and has a moderate risk profile.

“The ability to write off the cost of the investment against taxable income provides downside protection and enhances overall returns for investors,” says Miller.

The fund is a tax-efficient partnership structure, with investors receiving bi-annual distributions from the profits of the partnership.

While the term of the fund is ten years, there is no minimum prescribed period to hold the asset to benefit from the Section 12B allowance.

The minimum investment amount is R100 000 and there is no maximum cap on investments into the fund.

HOW IT WORKS

Twelve B provides a working example of its fund by noting that an investor putting R100 000 into a solar kit in March that will start generating energy in May, will be able to deduct the full R100 000 from their taxable income for the financial year to end February 2024.

In another case, an investor with R100 000, puts R70 000 towards a solar kit in March, which starts generating energy in the year ended February 2024.

This second investor can then deduct R70 000 from their taxable income for the financial year ended February 2024, with the balance of R30 000 to be deducted from taxable income in the 2025 tax year when the balance of the solar kit comes into operation.