In this discussion, Alec Hogg speaks with Mitchell Fieldgate of Pangea Wealth and Luel Culwick of Decentral about the success and future of South Africa’s 12B tax incentive, which encourages private sector investment in solar energy to mitigate load shedding. The 12B incentive offers substantial tax deductions—up to 222%—for investments in qualifying solar projects, leading to significant private sector involvement. Fieldgate and Culwick highlight the importance of viewing 12B investments as solid financial opportunities, partnering with reliable companies, and acting swiftly due to the finite availability of the 12B incentive, ensuring investors can benefit fully from tax deductions while supporting South Africa’s energy infrastructure.
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Highlights from the interview
In this discussion, Alec Hogg speaks with Mitchell Fieldgate of Pangea Wealth and Luel Culwick of Decentral about the success and future of South Africa’s 12B tax incentive, which encourages private sector investment in solar energy to mitigate load shedding. The 12B incentive, similar to the earlier 12J scheme, offers substantial tax deductions—up to 222%—for investments in qualifying solar projects. This has led to significant private sector involvement, with recent estimates suggesting the incentive helped deploy 6 megawatts of solar energy, equivalent to three load-shedding stages.
Fieldgate emphasises viewing 12B investments as solid financial opportunities rather than tax-saving schemes. He highlights the necessity of partnering with established, reliable companies like Decentral, with a proven track record and significant project pipelines. He also points out the importance of diversification within investments to mitigate risks, especially given the looming uncertainty about extending the 12B incentive.
Culwick explains Decentral’s structured approach to project execution, ensuring that only feasible projects with secure power purchase agreements are pursued. This strategy has allowed Decentral to confidently promise to deploy all projects before the tax year ends on 28 February 2024, ensuring investors can fully benefit from the tax deductions.
The conversation underscores the urgency for investors to act swiftly due to the finite availability of the 12B incentive and the potential for substantial tax savings while supporting South Africa’s energy infrastructure.
Edited transcript of the interview
Alec Hogg
(00:11.28)
The BizNews tribe has been investing heavily into the 12B opportunity, so much so that our original partners, Jaltech and Futureneers, are fully subscribed. Why has it been so successful? Well, the government had to find a way to beat load shedding. By bringing in the private sector with tax incentives, that’s happened. Today, we’re talking to Mitchell Fieldgate and Luel Culwick. Mitchell’s with Pangea Wealth, and Luel is with Decentral. It’s a great partnership: on one hand, you’ve got the asset manager, and on the other, the energy provider. So, 12B is not dead just yet.
Alec Hogg
(01:08.772)
Mitchell, it’s interesting that this is a tax incentive in South Africa, and I know you know about this because you’ve been in this alternative investment field for a while. We first had 12J, which was very successful, and then they closed it. It took a while to get successful, but once it did, they closed it. Then, the Treasury and the whole country got into big trouble with the load-shedding crisis. Here comes another version of 12J, very focused. How long do you think this 12B will last, given that we’re not having load shedding at the moment and haven’t for some months?
Mitchell Fieldgate
(01:53.238)
Yeah, hi, Alec. Thanks; it’s great to be here. The 12J and 12B incentives have been extremely successful. They show the power of the private sector when given an opportunity. Last year alone, this incentive helped deploy 6 megawatts of solar, equivalent to three load shedding stages. It’s amazing, with extremely high deductions of 125%. Many 12B investments incorporate debt, so you put in 100 bucks, add 80 in debt, and get a 125% deduction on 180.
Alec Hogg
(02:38.893)
Hmm.
Mitchell Fieldgate
(02:48.966)
So, in the short term, SARS is losing, but it’s important for investors to know that this isn’t out of the kindness of their hearts. They’ve done the math, and the long-term benefits are substantial. People have short memories, but not even two years ago, we had stage six load shedding, losing 900 million rand daily. The economic downside was bad, and the political downside was worse. People care about clean water and electricity, and the government got hammered in the polls due to poor energy management. They might have fixed the crisis sooner if they had done this incentive earlier. There have been talks about extending it, but we don’t think they will. They’ve put tariffs on imports, indicating a turn against solar. This urgency to get in on the tax incentive is because it’s likely the last year it’s available.
Alec Hogg
(04:50.716)
It’s almost like a sale; get it while it’s still there because it won’t last long. Although we now have a coalition, the ANC government does not like incentives, although this one worked for them. Luel, you’ve been in this field for a decade and a half. How did you and Mitchell find each other and start working together on this?
Luel
(05:26.257)
Mitchell’s business partner, Jamie, is a good friend of Decentral co-founder Christian Bodhi. We connected in February while doing Fund One, our 12B Fund One Decentral Green Energy. It’s been a fantastic relationship, growing from strength to strength. We have a good cultural fit, a commitment to entrepreneurialism, ethical business, and fun together.
Alec Hogg
(06:12.532)
Tell us more about Decentral and the projects you’re involved in.
Luel
(06:22.47)
Decentral was founded in 2009. While studying, my business partner and I started developing a five-megawatt hydropower project. We’ve since become a fully-fledged, vertically integrated IPP, owning and operating 50 projects nationwide, averaging half a megawatt each. We handle everything from project development, engineering, procurement, construction, capital raising, investment, and asset management. We currently have 20 assets under construction and expect another 30 or 40 by February. We provide commercial and technical solutions to support our customers’ growth.
Alec Hogg
(07:59.667)
Mitchell, clearly, Luel and his team have been around a long time. I presume that played a big part in your partnership on this 12B project.
Mitchell Fieldgate
(08:13.238)
Yes, I’m a wealth manager by profession, and we’ve done a lot of 12Bs and placed clients into various 12Bs. We saw what worked and what didn’t, and we’ve tried to elevate the successful elements and mitigate risks. Partnering with Luel and Decentral has been phenomenal. A major risk with 12B investments is getting blinded by the tax incentive. It’s important to see the underlying asset as an investment first. The same applies to 12B; you need to see the track record. Decentral would still be doing fine without 12B, and that’s crucial. Another risk is the lack of understanding of debt and legal agreements. We have Weber Wenzel for legal and tax counsel. Diversification is also key. Decentral has 44 projects lined up, providing peace of mind. Deployment and deduction must happen this year, and Decentral has the capacity and expertise to make it operational before year-end. They’ve agreed to zero upfront and annual fees, only performance fees. If investors don’t earn, Decentral doesn’t earn. This and other aspects are why we’re bullish on Decentral and partnering with them. Investors should ensure they tick all these boxes before jumping in and not just be blinded by the tax-saving headlines.
Alec Hogg
(13:01.283)
There are many good points, not least that projects must be operational by 28 February, not just year-end. Luel, what’s your confidence in operationalising all projects by the deadline? If they aren’t, what happens to the investors?
Luel
(14:06.341)
We secure the project first, then put it into execution. We are confident all assets will be in use before 28 February. If some are touch and go, we won’t raise capital for them. We only raise capital for assets we are sure will be operational. Last year, we managed 15 assets but raised capital for six, ensuring 100% deployment and full deductions for investors. We follow this order: secure projects, ensure execution certainty, then raise capital.
Alec Hogg
(15:52.737)
Assuming the business community knows about 12B, Mitchell, can you recap how it works and who it appeals to?
Mitchell Fieldgate
(16:15.606)
Sure, investors join an income and deed limited partnership managed by Decentral Energy as a limited partner. This structure allows proportional tax deductions. For new assets, you get a 125% deduction; for secondary assets, 100%. With debt incorporation, you can get a 222% deduction, leading to a 100% tax saving for top tax bracket earners. Considering their specific financial situation, we tailor solutions to maximize tax benefits for each client.
Alec Hogg
(20:00.377)
It’s a fascinating subject. At dinner recently, someone mentioned it sounds too good to be true, but it’s real and won’t last. Something had to be done with the load-shedding issues, and it worked. You can still benefit until 28 February. Mitchell, it’s been great talking with you and Llewell Colwick from Decentral. A reputable wealth manager like Pangia and Decentral together create a strong partnership. Overlay that with SARS’ incentives, and it’s a winning combination. Is there a cap on the investment amount?
Mitchell Fieldgate
(21:26.87)
We have had big clients invest millions instead of paying CGT. It’s first come, first serve. We have 250 million in the pipeline and aim to expand. The max investment could be around 100 million. It’s first come, first serve, just like other successful 12B funds.
Alec Hogg
(22:21.179)
Mitchell Fieldgate with Pangea Wealth, Luel Culwick with Decentral, and I’m Alec Hogg from BizNews.com.
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