Project Details :
Project ID : P166936, Status : Active, Team Leader : Frederic Verdol, Rhonda Lenai Jordan Antoine
Country : Lesotho, Approval Date : (as of board presentation) January 30, 2020
Total Project Cost : US$ 52.90 million, Region : Africa, Closing Date : January 31, 2027
US$ 40.00 million
INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 29.2 MILLION (US$40.0 MILLION EQUIVALENT) A PROPOSED GRANT IN THE AMOUNT OF US$4.9 MILLION FROM SCALING-UP RENEWABLE ENERGY PROGRAM UNDER THE STRATEGIC CLIMATE FUND AND A PROPOSED LOAN IN THE AMOUNT OF US$8.0 MILLION FROM SCALING-UP RENEWABLE ENERGY PROGRAM UNDER THE STRATEGIC CLIMATE FUND
TO THE KINGDOM OF LESOTHO FOR THE LESOTHO RENEWABLE ENERGY AND ENERGY ACCESS PROJECT January 8, 2020 Energy and Extractives Global Practice Africa Region
A. Country Context 1. The Kingdom of Lesotho is a mountainous country in Southern Africa, with a unique geography as it is landlocked by South Africa. Roughly 80 percent of Lesotho’s land is more than 1,800 m above sea level; the average elevation is 2,161 m.1 Lesotho is a lower-middle-income country with per capita gross national income (GNI) of US$1,330.2 It is a small and largely rural country of about 2.1 million people, of whom more than 99 percent are ethnic Basotho. About 60 percent of Basotho live in the districts of Berea, Leribe, Maseru, and Mafeteng, in the arable lowlands. The remaining population lives in six districts that include the Senqu River Valley and comparatively more mountainous lands. Most people live in rural areas, but the share of the urban population has increased substantially, from 14 percent in 1990 to 27 percent in 2015. Population growth has slowed since the early 1990s, from 2 percent a year to slightly more than 1 percent. Lesotho diaspora living abroad totals approximately 135,0003 people, mostly educated professionals and mining workers in South Africa. 2. Lesotho has an open economy, traditionally centered on trade. Its main exports are textiles, water, and diamonds. Lesotho’s economy has changed structurally in the last two decades; once based on remittances and agriculture, the country’s economic growth is now driven by value-added output in the service sectors, such as wholesale and retail trade, and in manufacturing sectors, such as textile manufacture and mining. Lesotho’s main trading partners are the United States and South Africa. As a member of the Common Monetary Area, its currency the Lesotho maloti is pegged to the South African rand. Lesotho is also part of the Southern African Customs Union, a union between Botswana, Lesotho, Namibia, South Africa, and Swaziland by which members pool the customs duties and excise taxes they collect and redistribute the funds among the five member states. Lesotho is also highly vulnerable to climate change and regularly experiences drought, floods, frosts, heavy snowfalls, strong winds, hailstorms, and tornadoes. These adverse conditions undermine the country’s economic development and are expected to worsen as Lesotho becomes drier and hotter in the years to come.4 3. Despite a track record of economic growth, Lesotho faces a triple challenge of poverty, inequality, and unemployment. Lesotho recorded continuous economic growth of 2.5 percent per capita over the past decade but showed moderate progress in poverty reduction.5 It is estimated that 49.7 percent of the population lives below the national poverty line, down from 56.6 percent in 2002.6 Urban areas saw strong poverty reduction, while rural areas’ poverty levels stagnated, adding to an already large urban-rural divide. The modest decline in the national poverty rate masks a notable decline in extreme poverty and inequality. Although Lesotho is now more equal than its neighbors, with a Gini coefficient of 44.6, it remains one of the 20 percent most unequal countries in the world. 4. Prospects of future growth are hindered by acute and persistent unemployment among the large cohorts of youth. Lesotho suffers from double-digit unemployment rates, particularly severe among
the youth. In 2015, the broad unemployment rate was 28 percent and 43 percent among the youth (ages 15 to 24), reflecting no significant improvement since the beginning of the century (overall and youth unemployment rates were, respectively, 27 percent and 33 percent in 1999). This dismal situation in the labor market comes at a time when the country is entering a window of demographic opportunity, a period when the ratio of the working-age population to the dependent-age population increases rapidly. If the current large cohorts of young Basotho are productively employed, the country can leverage the demographic opportunity to grow richer. Recent simulations show that gross domestic product per capita in Lesotho could more than triple by 2050 by improving education, employment, and productivity among the younger generations.7 B. Sectoral and Institutional Context 5. The Ministry of Energy and Meteorology (MEM) is responsible for overall policy making and financial planning in Lesotho’s energy sector. The Department of Energy (DoE), a part of the MEM, is responsible for coordinating, monitoring, and evaluating programs and activities in the energy sector. The DoE has three divisions: conventional energy, renewable energy (RE), and planning. Each division is responsible for collecting data on sector activities and supporting coordination among stakeholders relevant to its focus area. 6. The electricity sector in Lesotho is vertically unbundled with the Lesotho Highlands Development Authority (LHDA)8 having the mandate to generate electricity and the Lesotho Electricity Company (LEC) having the mandate for transmission and distribution of electricity, bulk electricity supply, and management of off-grid stations (mini-hydro and diesel) in the mountainous areas of Semonkong and Mantšonyane. The electricity sector is regulated by the Lesotho Electricity and Water Authority (LEWA) with the mandate to promote the expansion of electricity supply in Lesotho, where it is economically viable and cost-effective; ensure the operation and development of a safe, efficient, and economic electricity sector; protect the interests of all classes of electricity consumers as to the terms, conditions, and price of supply; and ensure that electrification is accelerated.
Electricity demand in Lesotho totals 160 MW;9 however, more than half of the demand is supplied from imports of electricity. Lesotho’s main source of power generation is the 72 MW Muela hydropower plant managed by the LHDA. This provides for 40 percent of the demand and the rest is supplied using imports from South African Public Utility (Elektrisiteitsvoorsieningskommissie, ESKOM) and Electricity of Mozambique (Electricidade de Mocambique, EDM)—mostly coal-based power generation. In 2016–2017, of the 862 GWh of electricity purchased, LEC imported 373 GWh of electricity from South Africa (ESKOM) and Mozambique (EDM) at prices which range from M 0.77 to M 1.50 per kWh, substantially higher than purchases from the Muela hydropower plant at M 0.13 per kWh. As such, electricity imports amounted to 86 percent of LEC’s supply costs. According to LEC’s projections, peak power demand is expected to grow to 204 MW by 2020 and 432 MW by 2030. 8. Lesotho is fortunate to have an abundance of RE resources such as solar, wind, and hydropower, which have the potential to surpass Lesotho’s relatively modest energy needs. Wind potential exceeds 1,000 W/m2 in certain pockets of the country, and global horizontal irradiation exceeds 5.3 kWh/m2 in most parts of the country.10 The Scaling Up Renewable Energy Program in Low Income Countries (SREP) Investment Plan for Lesotho (P166936), prepared with the support of the World Bank and other donors, presents the total technical capacity11 of renewable resources as 2,300 MW, with annual energy generation potential of 5,900 GWh. Lesotho’s Energy Policy 2015–2025 recognizes that these resources can be transformational energy sources, especially in remote, hard-to-reach areas of the country such as the highlands located in the east and central parts of the country mainly in the districts of Thaba-Tseka, Mokhotlong, Qacha’s Nek, and Quthing. 9. Realizing the potential of these RE resources is a focus of the Government’s Vision 2020 Strategy,12 and the draft National Strategic Development Plan (NSDP) II 2019–2023 viewed it to be a potential catalyst for job creation and growth in private sector investment. The NSDP calls for increased clean energy production to attain self-sufficiency and export potential, expanded electricity access, and better, more efficient use of domestic energy resources. Investment in RE is viewed as a means for addressing many of the energy sector challenges faced by Lesotho, as it would contribute to reduce Lesotho’s dependence on electricity imports, alleviate fuel imports and the use of wood fuel, as well as provide decentralized electricity for rural development and leverage private sector investment. Therefore, the Government of Lesotho (GoL) has set a target to increase the use of RE resources by 200 MW by 2020. Despite its low market penetration, demonstrated cost-effectiveness of decentralized RE technologies powered by solar photovoltaic (PV), wind, or micro-hydro could bring access to modern energy services to the Basotho who currently rely on biomass and kerosene to meet their energy needs. 10. Despite the significant RE potential, larger-scale development and private sector investment have not yet materialized. The constraints limiting RE development in Lesotho include the following: (a) Regulatory and institutional barriers, such as an incomplete legal and regulatory framework, overlapping institutional mandates of various energy sector entities, and the lack of technical standards on RE installations and appliances, create an uncertain investment climate for RE investors and development. (b) Technical and capacity barriers, such as irregular, outdated, and incomplete RE resource and energy baseline studies and limited knowledge and capacity from the institutional to the end-user level, hinder RE uptake. (c) Environmental barriers, such as declining biomass stock, increasingly variable rainfall and periods of drought, and limited availability of suitable land for RE development, increase the cost of RE deployment. (d) Financial barriers, such as limited access to financing and underdeveloped delivery mechanisms for households and private sector, high levies and taxes on imported components of RE systems, and the high cost of distributing RE technologies to dispersed and remote communities in Lesotho, limit the scaling-up of RE deployment. (e) Social barriers, in particular the lack of awareness among Basotho about the health and cost saving benefits of RE technologies, limit RE uptake. 11. Electricity access in Lesotho is low. The national electricity access rates stand at 38 percent with 60 percent for urban and peri-urban households and 18 percent for rural households (see figure 1). Current access rates have been achieved largely due to the recent push by the Government to accelerate electrification through an annual budget for electrification and funding from the Universal Access Fund (UAF) managed by LEWA. The UAF collects roughly M 18 million annually used to promote national electrification. The UAF is funded by levies (M 0.02 for domestic and M 0.03 for industrial) on every unit of electricity purchased. The main purpose of the UAF is to (a) subsidize the capital costs of new areas for electrification; (b) provide concessionary financing to developers toward the construction and upgrading for electrical systems for new areas of electrification; (c) facilitate education and training to local communities in the safe and efficient use of electricity; and (d) facilitate research relevant to the supply of electricity in rural areas. The UAF is currently funding only on-grid electrification efforts, mainly extensions of the existing LEC grid network. In 2016–2017, the annual budget allocation funded 21 electrification projects while the UAF funded five electrification projects. The GoL sets annual electrification targets for LEC of 15,000 connections, which LEC has been successfully achieving by extending its grid. Roughly 80 percent and 60 percent of currently connected households were provided with access in the last 10 and 5 years, respectively. To date, LEC customer connections are at 235,000.
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