Lesotho implements structural reforms in the Energy Sector

NEWS

Lesotho implements structural reforms in the Energy Sector

The Government of Lesotho is developing a project with the goal to reinforce the role of the Department of Energy as the key stakeholder of the Energy Sector and to promote a transformation of the energy sector focused on reaching a larger number of the Basotho population that are still deprived of modern energy services.

To achieve this goals, a capacity building program in energy policy and regulatory framework is being developed by an international team of experts. Gesto is supporting this project in several areas, namely in the establishment of a financing mechanism to develop rural energy projects and create an ecosystem that attracts the private sector.

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In order to implement the Government policy in the off-grid area, to design rural energy programs and to look for funds from donors to fulfill the electrification master plan, there is a need to establish a financing mechanism for rural energy access that can help scale up the development of “small-scale projects” (mini-grid, stand-alone systems in particular in off-areas) and create an ecosystem that will attract the participation of the private sector.

The Scoping Study discusses the concept of a new facility called FREA – Facility for Rural Energy Action – arguing that there needs to be more support for the rural energy agenda otherwise rural populations will not get access to modern energy services despite the government commitment.

The establishment of a central rural energy financing mechanism is considered as an effective approach to provide financing for projects in the mid to long term. It should mobilize contributions either from government budget, sector resources and/or soft loans and grants from international and local financial institutions and becomes the central instrument for rural electrification efforts. The key is to design financial incentives that are effective (triggering actual market activity), targeted (leading to the energy access of the rural households) and cost-effective.

Under the support provided, Gesto was responsible for the conceptualization and structure of a Financing Facility for Rural Energy Access:

  1. Undertaking a market-scoping and positioning study in order to review the existing energy sector initiatives in Lesotho, in order to identify present gaps as well as efforts complementary to those envisaged to be undertaken by the Facility
  2. Reviewing the Universal Access Fund (UAF) and the Petroleum Fund operation modalities and identifying any potential for synergy
  3. Identifying the potential pipeline volume for off-grid projects, if possible, during the first five years of the Facility’s lifespan
  4. Consulting IFIs to act as the anchor investor and sponsor of the Facility (e.g. EIB, AfDB, WB)
  5. Proposing the appropriate structure for the Facility (in the form of an Off-Grid Agency or similar), advising on the suitability of management structure, taking into consideration the Facility’s envisaged group of potential investors, lenders and providers of other forms of support. Prospective financiers include commercial banks, international donor agencies, development financial institutions, impact investors, and private sector institutional investors
  6. Proposing an investment strategy, an investment policy framework, a procurement policy, as well as operational and financial systems for the Facility, including appropriate governance mechanisms
  7. Developing a financial model based upon proposed Facility structure, identifying an optimal portfolio mix
  8. Proposing ways in which the Facility may promote lessons learnt and sector awareness for existing financial intermediaries, particularly local commercial banks
  9. Reviewing the suitability of instruments to be provided by the Facility to meet the financing needs of targeted small-scale projects.