Business Opinion

Impact of import duties on off-grid solar in ECOWAS – Lessons from East Africa

By Kolawole Ebire and Ifeoma Malo

The World Bank estimates that the West African region has one of the lowest per capita energy consumptions at 160kWh with more than 50% of its population lacking access to electricity. Many ECOWAS countries are facing the challenge of energy poverty, and governments are struggling to provide sufficient power generation capacity to meet rising demand.

The challenges of infrastructure needs of the power sector, and the availability of resources to expand electrification, transmission distances, often makes grid extension to rural areas costly and sometimes unfeasible.

Consequently, rural electrification rates in many countries throughout the region are as low as 1.3%. The electricity access rate across ECOWAS is projected to reach 90% by 2030 given the current targets of its countries. Currently, only 3% of the region is served by off-grid and decentralized electricity. However, the share of rural communities served by the off-grid is expected to reach 25% by 2030 which is approximately 60 million people.

Several ECOWAS countries have taken measures to address this challenge by implementing policies to scale up the sector. However, there are several fiscal and import barriers across many ECOWAS countries which act as a barrier to market development and solar product uptake. One factor that stands out is the high duties and VAT which drivesup the cost of solar products by about $280 or up to 29.4%.

The lack of a standardized import process and the existence of these fiscal barriers such as the arbitrary charges imposed on solar technologies under the ECOWAS Common External Tariffs (CET), has led to an inefficient supply chain in the industry and an inability to deliver cost-effective products to end-users. Solar technologies have become more expensive and are thereby unaffordable across the region.This has become a deterrent towards achieving SDG Goal 7 of creating access to affordable, reliable, and clean energy for all by the year 2030.

The opportunity

There is a huge opportunity to scale up the renewable energy sector in the ECOWAS region given the number of people without access to energy, estimated to be over 200 million, representing one-third of Africa’s total unelectrified population. The implication of this figure is that SHS has large market potential in the region. Global Off-Grid Lighting Association solar market trends report shows that in 2018, less than 3 percent of the region was serviced by SHS, equivalent to 5 million individuals.

Additionally, the World Bank Regional Off-grid Electrification Project notes that about 31 million households (approximately 180 million people) could be electrified using SHS in West Africa and Sahel with a potential value of US$6.6 billion. With these potentials, creating a favourable environment can ultimately attract investors and increase uptake by rural dwellers. The growing opportunity of the sector can be maximized through a regional approach. The adoption of a regional exemption on import taxes for solar products could likely transform the West African off-grid solar sector and make it comparable to what is seen in East Africa.

Adopting the ECOWAS CET

The ECOWAS Common External Tariff (CET)is a fiscal policy measure that allows for the implementation of supplementary protection measures. These measures include an import adjustment tax and a supplementary protection tax intended to facilitate the adjustment of ECOWAS states during the first five years of the CET implementation. A key feature of this implementation plan is a reduction of import duty rates on specific items on the list aimed at promoting the development of the sector.

The current CET includes taxes on imported solar components which have resulted in higher prices of solar products in the region. The import duty and VAT on the solar component is accompanied by other taxes that make the final cost of these products high and unaffordable.

Benefits of tax exemption to the region

West African countries can harmonize their import duties and VAT on solar products and implement a regional exemption on them to drive the attainment of their electrification targets, improve the livelihood of rural and vulnerable populations, and catalyze significant private sector investment into the market.

Generally, the market becomes commercially viable where the cost to serve customers is lower than the ability or willingness to pay for the products. Exemption of tariffs can increase affordability, household savings, stimulate economic activities among consumers, and creates jobs in the OGS value chain, which in the long term, actually generates more government revenue.

The way forward – Lessons from East Africa

In East Africa, evidence shows that a 20% import tariff on solar home systems would yield an 18% reduction in sales. Currently, East Africa dominates most of the investment in off-grid solar and has improved their electrification rates through several fiscal measures including VAT and import duty exemptions on solar products.

Research by GOGLA on the volume of sales of solar products across different regions shows that the volume of sales in East Africa is more than that of West Africa, Middle and Southern Africa, Asia, Latin America, and the Caribbean. The implication is that the East Africa region will attract more businesses and make more sales than other regions. A key factor is the tax exemptions on solar products across the region, which has improved the ease of doing business in the East African off-grid market and has become the main point of attraction for private sector players to catalyze the market with more household adopting solar products.

Investments are geographically concentrated with East Africa dominating in terms of both value and number of investments, having received 60% of total capital to date due to the presence of a positive regulatory environment, and general ease of doing business. These factors encourage many OGS investors to invest in East Africa, which allowed these companies to attain a certain scale and attract more funds. Investors continue to track these investment criteria when considering expansion to other regions.

Tax exemptions can accelerate market growth and energy access in rural last-mile communities by making off-grid solar products more affordable, adoption of quality products, improved competitiveness, reduction in cost which will lead to affordability, household savings, job creation, economic growth, and reduction in CO2 emission in line with SDG 7.

Ebire is the Manager – Energy Access at Clean Technology Hub;

Malo is the Co-founder and CEO of Clean Technology Hub

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