Technical Assistance Facility (TAF) experts for Lesotho in the energy sector

CONTEXT

Lesotho is experiencing a considerable energy deficit. Lesotho Energy balance is highly dominated by biomass, with over 60% of the population dependent on it for energy needs. The total current household electrification rate is 38% well below the United Nations Initiative on Sustainable Energy for All (SE4ALL) goals. Electricity only accounts for 7% of national energy consumed.

The country generates around 72 Megawatts (MW) from the Muela hydropower station and requires about 145 to 150 MW in peak periods. Therefore Lesotho has to import around 68 MW, mainly from Mozambique (29% of peak demand) and further from South Africa (20%).

As a result of power shortages in South Africa in 2008, ESKOM (the South African utility) reduced the supply of electricity to Lesotho and other neighbouring countries, leading to widespread load-shedding in that year. There are fears that further load shedding might be required in the future until generation investments are completed in South Africa and other demand-side measures are implemented. For this reason the Government of Lesotho wishes the country to become self-sufficient in the next few years.

Under the 11th EDF there is a budget of € 28 million for energy projects. There has been an identification mission to see what kind of projects could be developed under the 11th EDF, resulting in the report Scoping of Potential Interventions in the Energy Sector under 11th EDF in Lesotho, 19 January 2015. After the scoping mission there have been two missions of the Technical Assistance Facility (TAF) Key Expert (KE) on rural electrification, resulting in two mission reports.

Both the Scoping Study as the KE reports came to the conclusion that policy support is needed in order to strengthen the sector.

OBJECTIVES

Beginning of April 2016 the Department of Energy (DoE) of Lesotho came with a request for several policy support activities:

• To strengthen the Department of Energy in order to perform its coordination function effectively
• To clarify mandates and roles of different institutions in the energy sector
• To have an updated and improved electrification master plan and resource mapping
• To translate the recently (2015) approved Energy Policy for Lesotho into Legislation.

In addition to the requested points above, the TAF Key Expert (KE) on rural electrification also identified other additional support requirements:

• Data collection on the energy sector
• Policies to improve the involvement of the private sector.
• Technical Assistance to Enhance LEC Compliance to the Regulatory Regime

The ultimate selection of support activities to be included depends on the wishes of the DoE, in combination with the expertise of the consultant, the EUD, DEVCO C6.

The general objective is to have a long term (nine months) support to the DoE and energy sector.

There are three specific objectives:

• support the implementation of the recommendations resulting from Task 1, as part of the overall support to the programme of change in the sector: strengthen the Department of Energy in order to perform its coordination function effectively and clarify mandates and roles of different institutions in the energy sector;
• prepare for the update and improvement of the electrification master plan;
• translate the recently (2015) approved Energy Policy for Lesotho into Legislation resulting from the implementation of new mandates and roles of different institutions in the energy sector..
• conceptualize and structure a Financing Facility for Rural Energy Access (FREA)

Each main line of action has an associated set of outputs and results to be delivered during implementation.

The project’s success depends on Government providing positive critical support throughout the period and it is therefore essential that the EU TAF works closely with DoE staff members.

DESCRIPTION

Low electrification rates in Lesotho remain a significant impediment to development and economic growth. A key priority for the GoL is to address its energy deficit with the goal of providing universal access to energy services.

In order to implement the GoL 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 Scoping Study conceptualizes this Facility as a mechanism that should be implemented through the Local Finance Institutions operating as Trust Agents and becomes the central instrument for rural energy efforts, including rural electrification. Local FIs are better equipped and know the local clients better.

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.

The Energy Policy 2015-2015 recognizes the FREA, but the Facility’s possible place in the institutional governance set up of the energy sector is not yet depicted.

The Task is intended to conceptualize and structure the FREA, which will have a strong focus on financing small-scale energy projects in off-grid areas. Gesto is asked to provide an in-depth analysis and to clarify the optimal configuration of it.

Gesto will be responsible for undertaking the following activities:

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

• Reviewing the Universal Access Fund (UAF) and the Petroleum Fund operation modalities and identifying any potential for synergy

• Identifying the potential pipeline volume for off-grid projects, if possible, during the first five years of the Facility’s lifespan

• Consulting one or more IFIs to act as the anchor investor and sponsor of the Facility (e.g. EIB, AfDB, WB)

• 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

• 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

• Developing a financial model based upon proposed Facility structure, identifying an optimal portfolio mix

• Proposing ways in which the Facility may promote lessons learnt and sector awareness for existing financial intermediaries, particularly local commercial banks

• Reviewing the suitability of instruments to be provided by the Facility to meet the financing needs of targeted small-scale projects.

The final report (to be presented during a workshop involving IFIs and Local commercial Banks) should include:

• Scope and purpose
• Overall structure
• Governance
• Implementation arrangements
• Financial resources
• Areas of engagement
• Instruments for project identification
• Type of financial support to be provided

SUMMARY OF SERVICES

• Energy Sector Assessment
• Analysis and Benchmark on Industry Best Practices
• Developing Strategies for Rural Electrification
• Conceptualizing a Financing facility for Rural Electrification