PIETER DE VILLIERS: Just get moving along the green brick road

As we hurtle towards the COP26 UN climate change conference in Glasgow, SA businesses are waking up too slowly to the realisation that they can no longer consign their energy strategies to the back burner.

Two powerful forces are mounting a pincer attack which will force them to take action. And the costs of inaction will be cripplingly high.

The first threat comes from Eskom, the electricity utility we all love to hate, which has shown in successive waves that it lacks the reserve capacity to keep the power flowing once things start to go wrong. 

For many businesses, an unexpected power cut can be catastrophic, especially if their manufacturing processes rely on a steady stream of electricity. It is time for them to start thinking of energy independence — generating their own power from solar or wind. The days are gone when they could rely solely upon Eskom. It is a risk.

You might as well go greener, look at diversifying your sources of energy. The costs of renewable energy have shrunk in recent years; technology is advancing at an almost breakneck speed.

Then there is the threat, seen by many as a benign one, that the cost of producing emissions is going to climb higher and higher. Coupled with this is the realisation that many stakeholders — from shareholders to customers, to employees, to neighbouring communities — are expecting businesses to do more to be better corporate citizens, and the curbing of emissions is a central element.

SA already has a carbon tax, which is here to stay, and will grow more onerous year by year, pushing up costs and boosting the need to curb emissions. Our country intends to abide by the climate change commitments being made through the international conference of the parties (COP) process, and this will drive the move to higher and higher carbon taxes, as well as hopefully giving birth to a more comprehensive, generous and effective set of local incentives to cut down on the production of greenhouse gases. 

So my message to businesses in SA is that they need to be scared about the consequences of failing to march along the green brick road, and they must be proactive. They need to put a plan in place, and they need to get moving.

This will bring two real and worthwhile benefits. It will reduce their carbon tax burden, and also help them to deal with the protectionist carbon border taxes the EU and others are planning.

Meanwhile, this strategy should enable them to tap more and more into the carrots — the incentives for going green. This will put a favourable shine on their corporate image as well. This applies not just to heavy polluters but to all businesses.   The incentives to go green are likely to rise as the penalties for failing to act will multiply. 

In addition, we are seeing a change in stance from banks and other financial institutions. For instance, the FirstRand Group is no longer funding coal projects, and this trend against funding high carbon investments is likely to accelerate. 

The COP26  process will not only push forward action to tackle climate change. We are already beginning to see more leadership from wealthy countries to assist less wealthy ones. This should lead to more funding for green projects.

For some businesses, the transformation to a cleaner and greener production profile could be quite an expensive exercise. However, there are already incentives available to businesses as they take this journey, to assist them with energy security and net zero targets. Both the compliance costs and incentive benefits should be integrated into a business’ energy strategy.

What should an energy strategy look like?

An energy strategy can be very simple or very complex and is dependent on the type of business. Step 1 in compiling an energy strategy is for a company to perform a stock-take to see where it is and then to set its baseline. Simultaneously, it should determine the goal or target that it wants to achieve.

Step 2 will typically involve energy efficiency projects to reduce a company’s current energy consumption, which will then result in lower emissions.

Once the energy consumption is reduced and the low-hanging fruit has been plucked, Step 3 will be to identify alternative energy sources which are reliable and are low-carbon — such as natural gas, renewables, hydrogen and various other decarbonisation solutions.

It would be good practice for you as a business executive to keep track of your progress against your target. Where emissions just can’t easily or economically be cut any further, a firm needs to find another option, and this is where Step 4 — carbon offsetting — comes into play. A carbon offset is a way to compensate for your emissions by funding an equivalent CO₂ saving elsewhere.

As part of their energy strategy, companies should also include the benefit of lower costs, such as less carbon tax, into their financial models. A carefully considered energy strategy could result in a company falling out of the carbon tax net altogether, which could be very beneficial to its bottom line.

And what of incentives? Various incentives could be applied for to assist with the funding of a corporate energy strategy.

The section 12L tax incentive allows companies to claim 95c per kilowatt-hour of energy savings achieved against their taxable income. This incentive applies to most energy efficiency projects that result in electricity and fossil fuel savings. The SA National Energy Development Institute has reported that the average section 12L allowance claim has been R77.5m. 

In addition, there is the Critical Infrastructure Programme (CIP), which offers a grant of 10% to 30% of the total qualifying cost for infrastructural development, up to a maximum of R50m. Recent changes to the grant allow for clean or green energy infrastructure projects to qualify for support, even if the infrastructure is generating revenue for the investor.

There are also research and development (R&D) incentives, such as the section 11D R&D tax incentive. Successful applicants are granted a 150% deduction on all qualifying R&D expenditure (normally 100%); the 50% additional benefit when multiplied by the tax rate (28%) gives a net 14% cash benefit.

Another R&D incentive to consider is the Support Programme for Industrial Innovation (SPII). This incentive is a cash grant of 50% of qualifying costs, capped at a maximum grant of R5m. 

Other instruments to look at on the road to net zero are carbon credits and Renewable Energy Certificates (REC). A carbon credit is a tradeable commodity that is created from a project that reduces carbon emissions. A tradable REC is an electronic record that verifies the origin of energy by a registered renewable energy entity.

There is a lot here to digest, and a lot to consider.  However, the rewards can ensure you are able to run a sustainable business. And the cost of doing nothing is that your business could be driven to the wall.

So take your energy strategy from the bottom of the pile and place it on top of your priority list. If you want to avoid going into the red, it is time to look far more seriously at going green.

• Pieter de Villiers is an associate director at Cova Advisory and leads the Energy and Carbon Management team.