Lesotho Energy Programme
Lesotho Energy Programme
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Lesotho African Development Bank (AFDB)
29 November 2018 Project/Programme Title: Lesotho Energy Programme
Country(ies): Lesotho
National Designated Ministry of Tourism and Meteorology: Mabafokeny Mahahabisa Authority(ies) (NDA):
Accredited Entity(ies) (AE): African Development Bank (AFDB)
Date of first submission/ [2018-07-31] [V.1] version number:
Date of current submission/ [2018-07-31] [V.1] version number
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A. Project / Programme Information (max. 1 page) ☐ Project ☒ Public sector A.1. Project or programme A.2. Public or private sector ☒ Programme ☐ Private sector Yes ☐ No ☒ A.3. Is the CN submitted in Confidential If yes, specify the RFP: A.4. Confidentiality1 ☐ response to an RFP? ☒ Not confidential ______
Mitigation: Reduced emissions from:
☒ Energy access and power generation
☐ Low emission transport
☐ Buildings, cities and industries and appliances
A.5. Indicate the result areas ☐ Forestry and land use for the project/programme Adaptation: Increased resilience of:
☒ Most vulnerable people and communities
☐ Health and well-being, and food and water security
☒ Infrastructure and built environment
☒ Ecosystem and ecosystem services 881,528 direct beneficiaries. 40% A.7. Estimated adaptation A.6. Estimated mitigation of the population will benefit due impact (number of direct impact (tCO2eq over 5,494,052 MT to grid-wide access to renewable beneficiaries and % of lifespan) energy, improved energy security population) and lower pricing. A.8. Indicative total project Amount: USD 202,277,000 A.9. Indicative GCF Amount: USD 32,208,000 cost (GCF + co-finance) funding requested A.10. Mark the type of financial instrument ☒ Grant ☐ Reimbursable grant ☐ Guarantees ☐ Equity requested for the GCF ☐ Subordinated loan ☒ Senior Loan ☐ Other: specify______funding a) disbursement period: A.11. Estimated duration of A.12. Estimated project/ This refers to the total period over b) repayment period, if project/ programme: Programme lifespan which the investment is effective. applicable: A.13. Is funding from the Yes ☐ No ☒ ☐ A or I-1 Project Preparation Facility Other support received ☐ A.14. ESS category3 ☒ B or I-2 requested?2 If so, by who: ☐ C or I-3 A.15. Is the CN aligned with A.16. Has the CN been Yes ☒ No ☐ Yes ☒ No ☐ your accreditation standard? shared with the NDA?
Yes ☒ No ☐ A.18. Is the CN included in A.17. AMA signed (if If no, specify the status of the Entity Work Yes ☒ No ☐ submitted by AE) AMA negotiations and Programme? expected date of signing:
The Lesotho Energy Programme includes six activities for the electricity sector in Lesotho. A.19. Project/Programme Three will mitigate existing emissions, and three will help “climate-proof” essential rationale, objectives and infrastructure. The programme will enable Lesotho to reduce its carbon footprint by replacing approach of carbon-sourced fuels with low-emission sources in its national energy balance. In addition, it will programme/project (max 100 “climate proof” key infrastructure. Increased frequency and intensity of droughts, frost and words) storms is causing severe erosion and collapse of transmission lines that supply electricity to
1 Concept notes (or sections of) not marked as confidential may be published in accordance with the Information Disclosure Policy (Decision B.12/35) and the Review of the Initial Proposal Approval Process (Decision B.17/18). 2 See here for access to project preparation support request template and guidelines 3 Refer to the Fund’s environmental and social safeguards (Decision B.07/02)
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economically vulnerable populations. This programme will allow the nation to strengthen its infrastructure to climate impacts and reduce its reliance on fossil fuels. B. Project / Programme details (max. 8 pages) B.1. Context and Baseline (max. 2 pages) The Lesotho Energy Programme contains six ready-to-build projects for the electricity sector in Lesotho. Three will mitigate existing emissions, and three will help “climate-proof” essential infrastructure. The programme will accelerate the nation toward its goal of secure, low-emission, renewable energy production by increasing the supply of domestic, clean renewable sources and extending grid-access electricity to more households. It will also build climate resiliency into threatened infrastructure. In addition to moving the nation toward these important objectives, the economic and environmental co-benefits of the project are significant; they include: strengthening the livelihoods of highly vulnerable households (including women- and child-headed households), creating temporary jobs, and slowing the trend of rapid deforestation. Lesotho is a small nation that it is often overlooked by developers and occasionally by DFIs. Despite this, the nation has taken its role to reduce its level of GHG emissions from the energy sector seriously. Lesotho’s electricity company (LEC) draws predominantly from hydropower and maintains a national grid emission factor of just 0.0038 tCO2/GWh (the rest of the Southern Africa Power Pool’s operating grid emission factor is 0.9958 tCO2/GWh). Still, the share of emission from the energy sector has grown steadily, reaching about 30% of national emissions, and producing an annual total of 1,079 Gg CO2eq. The dominant source of emissions come from residential fuel combustion (51%), emanating from the use of wood, charcoal, LPG, and paraffin and importation of energy from predominantly fossil-based generation systems by Eskom.
Lesotho faces a dual problem: Mitigate CO2 emissions from its energy balance and Adapt national infrastructure to existing climate change. To solve the first, mitigation problem, Lesotho must reduce imports from Eskom and the burning of wood and charcoal. To solve the second adaptation problem, Lesotho must rehabilitate key infrastructure in the face of climate change damage. Mitigation Need: reduce Eskom imports and wood / charcoal burning. In order to reduce its carbon emissions from the electricity sector, Lesotho must address two primary objectives: 1. Reduce coal-dominated imports from South Africa. This objective can be met by adding low-emission, renewable generation plants to domestic electricity sources, and through efficiency measures that reduce line losses and peak demand. 2. Reduce the use of traditional household fuels, especially wood, charcoal, and dung. This objective can be addressed through accelerating the delivery of cleaner sources of electricity to remote villages and rural populations through the 4 national grid. According to the Blue-Sky Model, wood fuel emits 1.5 kg of CO2eq per kWh consumed; by contrast Lesotho’s national grid delivers energy at 0.22 kg of CO2eq per kWh. This objective also serves other important goals of reducing deforestation and eliminating negative health effects of smoke inhalation and accidental household fires. The implementation of the proposed programme will reduce emissions by over 70 million kg per year or 5,494,052,114 kg over the useful life of the various assets (5,494,052 MT of CO2-eq). Please see calculations in Financial Model and Pre-Feasibility Study. Three primary features of Lesotho’s energy consumption are important to understand the context of the proposed solutions: 1) Lesotho imports are coal dominated and expensive. Though LEC produces up to 65% of nationally consumed electricity from hydropower, at least 25% is imported from Eskom in South Africa, which produces 90% of its electricity using coal power plants. (An additional 10% is typically purchased from EDM in Mozambique.) One consequence is the 193,418,410 kg of CO2 from coal production. Another is the high cost of imported electricity. During the 2016 fiscal year, LEC purchased electricity domestically for USD 0.009/kWh while the weighted average cost of imported electricity was USD 0.087/kWh, nearly 10 times higher.
Table 1: Forecasted bulk energy supply sources for 2018
Source Purchased (kWh) Percentage of Total Total cost (USD) Cost/kWh (USD) Annual CO2 (kg) Domestic Hydro 519,187,043 59% 4,695,083 0.0090 0 Eskom 268,636,680 30% 19,247,541 0.0716 193,418,410 EDM (Imported 97,500,000 11% 11,113,540 0.1140 0 hydro) Total (average) 885,323,723 100% 35,056,165 (0.0407) 193,418,410 5
Source: LEWA 20176
4 See Blue-Sky Model at http://blueskymodel.org/kilowatt-hour. 5 A figure of .800 kg CO2 per kWh of coal-produced electricity was used, per: http://blueskymodel.org/kilowatt-hour. 6 Lesotho Electricity and Water Authority, LEWA’s Determination of LEC’s Tariff Application for 2017/2018, April 2017.
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Table 2: Eskom's Generation Fuels and Percentages
Fuel Coal Nuclear Hydropower Gas Other Mix Percentage 90% 5% 2% 1% 2%
Source: CRSES 20167 2) Rural residents rely on wood and charcoal fuel. On-grid vs. off-grid consumers are roughly divided along urban vs. rural population lines. The rural population of Lesotho represents 72% of the total. Correspondingly, access to electricity is 29.7%, reflecting the provision of service to urban populations, but its relative unavailability to rural dwellers. About 10% of the area serviced by the grid is defined as rural, while 47% of urban areas are electrified (UNDP, 2016 energy profile). These realities drive rural use of traditional fuels, especially wood, dung, charcoal, and LPG. The International Energy Agency estimates that Sub-Saharan African countries’ primary fuel mix contains 50% traditional fuels, on average, meaning that Lesotho’s traditional fuels consumption would total approximately 885,000,000 kWh, and produce an 8 additional 1,327,986,000 kg CO2eq. Table 3: Total Annual Emissions (including from wood and charcoal)
CO2-eq from Electricity CO2-eq from Traditional Fuels Total Emissions (kg) 193,418,410 1,327,986,000 1,521,404,410
3) Lesotho’s intra-annual temperature variation is large. Due to its high altitude, summer temperatures reach 30°C highs, while winter temps drop to nearly -20°C in the highland regions. Low temperatures drive peak use in the winter when demand can be 120 MW, significantly outstripping domestically produced power, which reaches its maximum at just over 80 MW.9 Additional generation capacity is needed. Adaptation Need: “climate-proof” essential infrastructure. Lesotho has done very little to cause climate change; it does, however, experience the effects in a disproportionate manner. Specifically, intermittent drought followed by intense storm events, has become more common. These include phenomena of high winds, and/or precipitation events: intense rainfall or snow. Much of the nation’s energy infrastructure (transmission and distribution lines, sub-stations, etc.) was constructed well before the volatilities introduced by climate change were understood. Though sound engineering principles were used in siting and design, the changing climate has now placed some infrastructure assets in danger of damage. If damage were to occur, the economic effects would be far costlier than introducing adaptive measures now (the cost-benefit analysis for each project is presented below). One result of these climate phenomena is an increasingly-frequent emergence of deep ravines, called dongas, near transmission towers, which threaten the collapse of the towers. Another result is the actual collapse of towers along a different route, due to a combination of extreme winds, frost and snow. Once the lines collapse, the LEC is unable to meet its obligation of providing reliable electricity supply and faces the risk of financial loss due to loss of sales and the financial obligation of repairing the line. As these, and other, climate risks emerge, LEC will have an increasingly difficult time adapting to the threats. The climate adaptation measures below will repair the dongas that threaten lines and re-route an additional line away from a high- wind area. These activities will help to “climate-proof” the nation’s vital infrastructure for years to come. Once completed, these adaptation components will lock in an economic cost savings of over $211 million, over a business as usual scenario. Climate change in Lesotho Increasing temperatures have been observed over recent decades. From 1970 to 2000 the total temperature increase was 0.7 °C. Climate change has impacted the water sector as perennial springs have run dry, previously robust rivers have been diminished, and many dams remain dry for most of the year. It has also impacted subsistence farming, which is in steady decline due to recurring droughts. According to Lesotho’s Second National Communication future scenarios paint a gloomy picture. They predict warmer temperatures and change in rainfall patterns, specifically decreasing summer precipitation and late onset of summer rains. Scenarios also show an increased intensity and frequency of extreme weather events such as floods and droughts. While drought conditions are common in Southern Africa, in Lesotho drought occurrences have become more frequent in recent years.10 The projects listed below are near-term energy sector priorities, taken from a project pipeline, which has been developed by the Energy Ministry and LEC. As such, their genesis is in the National Energy Policy, and it’s (draft) Renewable Energy Policy. The national policy aims to increase renewable energy sources by 200 MW, including at least 40 MW from solar, develop the uptake of solar power, improve energy efficiency, increase electricity coverage of households, and reduce traditional fuels consumption. Furthermore, the INDC recognizes that the energy sector will require investments for “energy efficient equipment, grid extension, and rural electrification projects (off-grids and mini-grids) that are ultimately expected to reduce emissions significantly…”. These
PROJECT / PROGRAMME CONCEPT NOTE Template V.2.0 GREEN CLIMATE FUND | PAGE 4 OF 12 objectives and others, are at least partially addressed with the suite of projects proposed in this Concept Note. Additional information about national energy policy is provided below. Barriers Several specific barriers keep Lesotho from fully achieving their low-emission energy goals: The lack of domestic, diversified, renewable energy sources. Studies have indicated that Lesotho possesses significant solar, wind and hydropower production potential. One such report places available solar potential at 187 MW, wind potential at 2077 MW, and additional hydropower at 36.11 However, several hurdles, including several listed below, have so far prevented new development. The lack of grid access continues the harmful practice of using wood and charcoal (among other fuels), for lighting, cooking and heating, especially in unserved villages. Besides CO2 emissions, the activities around this practice have several harmful effects: 1) they place an undue economic strain on vulnerable households, particularly those headed by women or children; 2) there are adverse health effects to the home use of charcoal, wood and dung, and; 3) fuel gathering activities are damaging to the environment, contributing to accelerated rates of deforestation in the nation.12 A lack of resources, on the part of the utility (LEC), is also a barrier. LEC lacks the resources to adequately maintain existing assets in the face of climate change and expand access through new renewable sources and additional transmission and distribution networks. According to the company’s audited financial reports for the year 2016, Operating Profits were US$ 5,691,973, and Total Comprehensive Income was US$ 4,451,097 (as a parastatal organization, the national government has a claim on 100% of company profits). A lack of resources is often cited as the reason for under-development of energy resources. For example, the generation capacity within the country has remained relatively stagnant for the past decade, with any growth in delivery coming from increased imports, which come at a premium. This is especially true of power coming from Mozambique, as those particular purchases are denominated in U.S. dollars. The unfavorable exchange rate between the Lesotho Loti and the US dollar, has driven purchase prices significantly higher. LEC sees one solution to be the development of domestically-produced electricity. There are other general barriers also stand in the way, especially relating to renewable energy (RE) deployment:13 • Financial barriers such as limited access to financing. • Regulatory and institutional barriers such as an incomplete legal and regulatory framework, overlapping institutional mandates from different agencies, and the lack of technical standards all create an uncertain investment climate. • Technical and capacity barriers such as irregular, outdated, and incomplete renewable energy resource and energy baseline studies and limited knowledge and capacity from the institutional to the end-user level hinders RE uptake. • Environmental barriers such as declining biomass stock, increasingly variable rainfall and periods of drought, and limited availability of suitable land for RE development increases the cost of RE deployment. • Social barriers, in particular the lack of awareness among Basotho people about the health and cost saving benefits of RE technologies limits RE uptake. Climate change related phenomena are threatening the infrastructure of the electricity grid in Lesotho. The required costs to repair the damages are keeping the LEC from doing other, more forward-looking work, of integrating additional renewable generation sources, and extending the grid to households that are not yet served. Several barriers listed above deal with the private-sector business environment in Lesotho and, one of the activities within the programme, the Neo1 Solar PV generation site, involves private sector investment. The U.S. company 1Pwr is currently the preferred bidder to provide 20 MW of grid-connected power and is in negotiations with the government. The AfDB has provided funding for pre-project studies; currently the technical assessment is in the tendering process. Once the full feasibility study is complete, LEC is expected to engage 1Pwr, entering into a power purchase agreement. The details of that agreement are still being investigated. As 1Pwr would exist inside the business environment of Lesotho, a word about that environment is appropriate. The 2015 World Bank Doing Business Report has eliminated some binding constraints to private investment (originally the consequence of the temporary suspension of Parliament in 2014), but reforms are moving slowly. Still, the macroeconomic climate has improved in recent years, and the U.S. International Trade Administration highlights that one of Lesotho’s best-prospect market sectors is infrastructure, specifically mentioning solar power.
7 CRSES, available at: http://www.crses.sun.ac.za/files/services/schools/electricity/Electricity%20word%2013.pdf. 8 A figure of 1.5 kg CO2 per kWh of wood-produced energy was used, per: http://blueskymodel.org/kilowatt-hour. 9 Ministry of Energy, Meteorology and Water Affairs, “Lesotho’s Second National Communication to the COP of the UNFCCC,” 2013. 10 Ministry of Energy, Meteorology and Water Affairs, “Lesotho’s Second National Communication to the COP of the UNFCCC,” 2013. 11 Lesotho Department of Energy, Scaling Up Renewable Energy in Low Income Countries, 2017 12 Lesotho Department of Energy, Scaling Up Renewable Energy in Low Income Countries, 2017 13 Lesotho Department of Energy, Scaling Up Renewable Energy in Low Income Countries, 2017.
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B.2. Project / Programme description (max. 3 pages)
The following six ready-to-build electricity project activities are grouped into two outcomes. The first addresses Lesotho’s mitigation, problem, the second it’s climate adaptation of existing infrastructure. Output 1, Mitigation: Reduce Eskom imports and wood/charcoal burning. 1. Activity 1.1: Neo1 20 MW solar PV plant. Cost USD 27.8 million. GCF loan request up to USD 10.24 million. This plant will replace electricity currently purchased from coal generation sources at Eskom in South Africa. In theory the project could replace 36.5 million kWh of currently imported, coal-based energy for the nation. This project supports the scaling up of low-emission energy in Lesotho by addressing key financial barriers that are preventing project close. Funds would be allocated toward the government’s feed-in tariff to make up for any possible shortfalls on behalf of the private partner. A concessionary loan will be pursued for this project. The precise amount of the financing gap is being investigated. 2. Activity 1.2: Neo2 70 MW solar PV plant. Cost USD 77.7 million. GCF loan request USD 7.8 million. This solar facility is also in late-stage pre-project planning. In theory the project could replace 102.2 million kWh of imported coal-based energy for the nation. LEC is working with the Chinese EXIM Bank to develop the plant as government-owned. There is a financing gap for this project as well. Commissioning of this project will further reduce reliance of Lesotho on coal- based production from Eskom. 3. Activity 1.3: Maseru-Qacha 132kV transmission line. Cost USD 50.1 million. GCF loan request USD 5 million. The line will connect a mini-grid, and other villages, to the primary network. Currently the mini-grid receives power from the Semonkong hydropower plant; however, during periods of low river flow, power delivery switches to a diesel generator. During peak seasons and periods of drought, the generator is heavily used. The new connection will limit the use of the generator and increase service reliability in the region. It will also reach an additional 58 villages, reducing their reliance on biomass fuels, deforestation from wood collection, and partially liberate women and children from the need to collect fuel. Outcome 2, Adaptation: “Climate-proof” essential infrastructure 4. Activity 2.1: Reroute Letseng line. Cost USD 12.3 million. GCF grant request USD 2.4 million (for resiliency measures). 40km of the 88kV Khukhune – Letšeng line, in the Mokhotlong district will be re-routed to avoid high-wind areas. Frost, snow and wind conditions have become increasingly worse, due to climate change (see photograph below). The line was damaged from collapsing towers in 2015; currently electricity is being transmitted over lines supported by temporary structures, which will eventually fail. Re-routing this particular section of the line, and strengthening both lines and pylons, will make service delivery more climate resilient. This line is the only transmission to the Mokhotlong district, which supports 5368 households of connected power. When it has failed the costs are significant. These include the opportunity costs for connected households to gather fuel, the lost wages from businesses that are forced to close, and the lost revenue to LEC during the repair. The primary economic entity in the district is the diamond mine, which depends delivered electricity for its operations, and which also employs many in the district. A grant is being requested for the incremental, climate adaptation portion of the new line. This will require a 15% upgrade in the cost of the project to use wires and towers of increased strength. 5. Activity 2.2: Rehabilitate ravines, Mafeteng District. Incremental cost up to USD 100,000. GCF grant request USD 100K. Expanding ravines threaten transmission lines. Ravine (called “dongas”) and river bank rehabilitation will take place along the 132kV line, near the Qhoqhoane River in the Mafeteng District. Lesotho has suffered soil erosion due to a cycle of drought and heavy rains, which has caused ravines to emerge and river beds to radically alter their shape. Though sound engineering studies were conducted prior to construction, the land near some towers has now become unstable, threatening the towers and the lines. The ground under the pylons will be strengthened with a retaining wall and drainage. Several acres of trees will also be planted, to further mitigate erosion, and positively offset a small percentage of the nation’s deforestation. Local labor will be used to accomplish the work, creating approximately 30 temporary jobs. 6. Activity 2.3: Rehabilitate ravines, Maseru District. Incremental cost up to USD 300,000. GCF grant request USD 300K. A series of dongas encroaching 11kV and 33kV lines in Motloheloa and Thaba – Bosiu regions will also be rehabilitated. An indicative picture is provided below. In this case, the ground around the pylon will be strengthened with retaining walls, drainage systems will be installed, and several acres of trees will be planted to reduce overall erosion.
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Theory of Change The goals of the national government are to reduce coal-based and wood / charcoal energy consumption, and “climate proof” essential infrastructure. The goals include reducing the nation’s vulnerability to climate change, increasing energy access to vulnerable communities, and accelerate low-emission energy integration into the grid system. The goals will be achieved by addressing three primary steps. First, financial barriers must be overcome to address both adaptation and mitigation concerns. Financial barriers are significantly responsible for holding back the LEC from achieving greater electricity delivery, beginning with rural villages; and from accelerating the development of new solar generation facilities. Therefore, the proposed partnership with GCF, and the facilitating role this proposal will play to attract additional capital, will be paramount in overcoming these capital constraints. Second, additional low-emission energy sources must be provided. These include both domestic renewable generation sources (activities 1.1 and 1.2), and the transmission wires necessary to deliver low-emission power to rural areas (activity 1.3). Third, system resiliency needs to be addressed (Outcome 2). Activities 2.1, 2.2, and 2.3 will upgrade vital, but vulnerable aspects of Lesotho’s electricity system. Institutional Factors Lesotho Electricity Company (LEC): The LEC is wholly owned by the Government of Lesotho and has a mandate to supply and distribute electricity across Lesotho, that was established in 1969. It has been registered in terms of the Companies Act of 1967 (as amended) and established in 2006 in terms of the LEC (Pty) Ltd Establishing and Vesting Act 2006. It is licensed to operate under the Lesotho Electricity Authority Act of 2002, as amended. The LEC maintains bilateral supply agreements with LHDA, ESKOM and EDM for its bulk electricity supply. LEC is primarily an electricity transmission and distribution operator, though it does own several small generation facilities: the 180 kW Semonkong hydropower plant (with 500kW diesel generator), and the 2 MW Mantsonyane hydro plant. Lesotho Highlands Development Authority (LHDA): The LHDA is the Lesotho branch of a bi-national water management project between the Governments of Lesotho (GOL) and the Republic of South Africa (RSA). The Project consists of a large hydropower reservoir and dam, the Muela Dam, and water delivery system, which supplies water to South Africa. A Treaty signed between the two governments sets out the structures that are required to implement the Project. It sells electricity to LEC. Lesotho Electricity and Water Authority (LEWA): LEWA was established through the Lesotho Electricity Authority (LEA) Act. No. 12 of 2002 as amended. LEWA is the utility regulator in Lesotho and operates in line with the Government policy on electricity and water supply matters. The Authority independently deals with matters such as electricity pricing, complaints handling and resolution and the supervision of the implementation of the Quality of Service and Supply standards (QOSSS) by its licensees. Ministries: In addition to the agencies and parastatal involved, four national ministries will coordinate to ensure financial close of the initiative, and breaking ground on the projects. • Ministry of Energy and Meteorology. Minister: Hon. Mokoto Hloaele; Principal Secretary: Mr. Khomoatsana Tau. This ministry creates energy policy and is part of the approval process for all LEC development. • Ministry of Finance. Minister: Hon. Dr Moeketsi Majoro; Principal Secretary: Ms. Motena Tsolo. This ministry oversees the national budget, and will be responsible for project disbursements, as well as legal compliance for government debt levels (budgetary headroom), etc. • Ministry of Tourism, Environment and Culture. Minister: Hon. Motlohi Maliehe; Principal Secretary: Ms. Motena Ts'olo. The GCF Focal Point for Lesotho sits within this ministry. Also, the LEC will need to work closely with the Environment division to ensure project plans comply with environmental regulations. • Ministry of Development Planning: Minister. Hon. Tlohelang Aumane; Principal Secretary: Ms. Nthoateng Lebona. Procurement Laws: The procurement laws associated with project development are based on Legal Notice No. 1 of 2007 and are titled Public Procurement Regulations 2007. Relevant aspects of the law are highlighted in the Pre-feasibility Report.
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Public Financial Management: In addition to the legal framework for procurement and project delivery, details of the public financial management (PFM) system are also provided in the Pre-feasibility Report. The PFM will be used for any monies allocated to the government for the projects within this programme. An OECD report on foreign aid effectiveness for the country of Lesotho was completed in 2011. It addressed the nation’s progress in implementing the Paris Declaration targets for public financial management. According to the report, “Lesotho has not been able to achieve significant progress towards meeting the Paris Declaration targets.” (OECD 2011) However, in recent years, engagements with the World Bank, African Development Bank and the EU have produced a PFM Reform Secretariat fully staffed in April of 2015. If approved, the projects within this proposal will build upon the World Bank PFM system strengthening work, further building PFM efficacy. The AfDB is well accustomed to working with and through Lesotho’s PFM. The Accredited Entity The accredited entity behind this proposal is the African Development Bank. The Bank is very well positioned to help drive the required change in the key ministries and agencies within Lesotho. The Bank offers a unified front to Lesotho’s government with all initiatives aligned in one direction and coordinated in an ongoing partnership. One division, the Green Growth team, targets projects with a strong environmental component. The other division, working on energy projects in the country, is working closely with Green Growth, to support delivery of the projects listed above. The Bank is working directly with the Lesotho Electricity Company, which will be the implementing partner for the programme. Initial meetings, facilitated by LEC and the Bank, with each of the key ministries (energy, finance, environment and meteorology) were very positive. All agencies are enthusiastic about the various outcomes, and furthermore are working together to provide the institutional support for project development. The LEC has formed a Task Team, made up of one representative from each ministry. The representative has been delegated by the ministry’s Principal Secretary. The Team has been tasked with two primary responsibilities: 1) to review the development of this proposal, gathering required facts and data, and offering input; and 2) to communicate the proposal development process back to the various ministries. Finally, these projects will extend the Bank’s existing portfolio of energy investments in Lesotho, building on previous experience, and extending best practices. Specifically, the Urban Distribution Rehabilitation and Transmission Expansion Project was executed on December 14, 2016 and commenced development on July 18, 2017. In this case the implementing agency is Lesotho’s Ministry of Finance. The full project cost was USD 15.9 million; the African Development Fund lent USD 10.5 million, while the government of Lesotho supplied the rest of the necessary capital. The project refurbishes switching stations and transmission lines, constructs 8 km of 132 kV line, upgrades a substation. It is expected to reduce losses by 2%, and outages by 25%. Importantly, this project enables future expansion of electricity access to rural populations and creates the right infrastructure to support private investment in the future, therefore laying the groundwork for the projects listed in this Concept Note. Risk Analysis Financial and operational risks apply to certain projects within the portfolio. The adaptation-related projects (donga rehabilitation and re-routing of 88kV line) do not face risks, in the traditional sense, in that the requested financing would come in the form of a grant. The same is true of the energy efficiency light bulb replacement project. However, these projects do reflect the socio- economic risk of the possibility of delays in program implementation, which would lower the economic return on the projects. The two solar generation facilities, and the two transmission line installations do face risks, which are outlined here. In some cases, the government will transfer risk to the private party supplying the service. In other cases, it will retain the risk; where it does, lending agencies will be exposed, in the absence of guarantees. Neo1 Solar PV: This project is being developed by a private power producer, so the design and construction risk have been transferred to the private party. The private provider of power will assume all risks related to project design, siting, construction, time delays, and commissioning. Regarding revenue and operations risks, the details of the power purchase agreement are not yet available; therefore, the extent to which the revenue risks have been transferred or retained is unclear at this point. If the agreement is a take-or-pay contract, the revenue risks will be retained by the government. This places the LEC as responsible for collection, which will be a retained risk. Operational risks that are based on power availability will be transferred to the private party through the power purchase agreement. Beyond the arrangement of the power purchase agreement, financing risks are borne by the private party; it will be up to the service provider to negotiate debt and equity terms, finance and re-finance the project. Neo2 Solar PV: This 70 MW project, being developed in conjunction with the Chinese EXIM bank, for government (LEC) ownership, faces a risk structure that is entirely borne by government. Project design, construction and commissioning may affect the expected value of the project in material ways. The role of the Chinese EXIM bank suggests a foreign EPC contractor, and perhaps operator. These risks may be slightly heightened as this will be the first significant Solar PV generation source that LEC has integrated into its network. Revenue and operational risks are also fully retained by the LEC, which will be operating a Solar PV plant for the first time. Revenue risks relate primarily to tariff expectations and collection issues; these risks are assumed to be
PROJECT / PROGRAMME CONCEPT NOTE Template V.2.0 GREEN CLIMATE FUND | PAGE 8 OF 12 low given the experience LEC has in these areas. By the time a decision on GCF participation is made, the financing of the project should be clear. Maseru-Qacha 132kV line: This transmission line project will be fully designed, built, operated and maintained by the LEC. Therefore, the government will retain the risks of the project. The line faces design and construction risks, perhaps especially so because of the linear nature of the infrastructure; for example, land acquisition may be an issue. During the social-environmental impact assessment, it may be discovered that additional costs are required for land purchases, or for diversions away from the intended pathway. Revenue and operational risks are considered relatively small given the experience of LEC in operating and maintaining transmission lines Financing risks are being partly addressed through this proposal, and the AfDB. B.3. Expected project results aligned with the GCF investment criteria (max. 3 pages)
Expectation of Impact
Mitigation core indicator: Reduces CO2 by 5,494,052 MT.
The programme represents a reduction in CO2 atmospheric release in the amount of 5,494,052 MT over the lifetime of the assets (5,494,052,114 kg). The breakdown of the CO2 eq. reduction is presented in Table 3 below. The combination of two Solar PV plants could replace all of the need for coal power imports during daylight hours. Adaptation core indicator: 881,528 direct beneficiaries, 40% of national population. The adaptation-oriented projects (re-routing of line (Activity 2.1) and donga rehabilitations (Activities 2.2 and 2.3)), which add resiliency to the nation’s energy infrastructure will directly benefit 82,168 people. These benefits come in the form of uninterrupted service and represent the populations of cities and villages currently served by the climate-threatened lines. These projects also offer a small mitigation component: if the assets are repaired before service is interrupted, the use of traditional fuels during the time it takes to repair the lines, will be avoided.
The following is a breakdown of the various project activities. In the first column, for each project the amount of CO2 equivalents is given in kg/year, as applicable. The second row indicates CO2 mitigation over the lifetime of the asset. The third column calculates 14 the economic savings of the reduced CO2 levels (valued at .036 USD/kg ). Column 4 indicates the estimated newly available low- emission energy from each activity. Columns 5 and 6 show the number of direct beneficiaries, and percent of the population that will directly benefit. Column 7 is inserted to show the number of indirect beneficiaries, though it is incomplete. Finally, column 8 lists the benefit to cost ratios of each activity. Table 4: Carbon equivalents avoided, new low-emission energy, direct beneficiaries, and BCA ratios
EXPECTATED IMPACTS:
MITIGATION AND ADAPTATION CORE INDICATORS
Activity CO2 Mitigated lifetime Direct beneficiaries % of Population Indirect % of population (kg) beneficiaries
Neo1 20 MW Solar 606,461,538 881,528 40% TBD TBD
N Neo2 70 MW Solar 2,122,615,385 881,528 40% TBD TBD OUTPUT 1: ACTIVITIES MITIGATIO Qacha Tx line 2,761,095,756 20,000 1% TBD TBD
Re-route Letseng Tx 3,067,683 25,230 1.1% 205,000 9.3% line
Maseru Ravines 776,300 44,692 2.0% 410,320 19% OUTPUT 2: ACTIVITIES ADAPATION Mafeteng Ravines 35,452 12,246 0.56% 193,796 9%
Totals 5,494,052,114 881,528 40% 809,116 36% Expected Impacts and Investment Criteria The programme’s activities will accelerate a consumption shift toward sustainable, clean energy, reduce dangerous environmental degradation, and place vulnerable women- and child-headed households on a development track that will significantly empower these underserved demographics. The activities will also serve to strengthen the national energy infrastructure system as its managers build resiliency into national assets. Paradigm shift: There are several paradigm shifts embodied in the execution of the projects. One is the scale-up of low-emission energy through the delivery of grid power: a shift from charcoal and wood fuels. Another is the potential scale-up of additional
14 Monetary values for CO2-eq taken from EPA website, January 2018: https://19january2017snapshot.epa.gov/climatechange/social-cost- carbon_.html.
PROJECT / PROGRAMME CONCEPT NOTE Template V.2.0 GREEN CLIMATE FUND | PAGE 9 OF 12 forms of low-emission energy, such as wind and solar, and the institutional mechanisms to develop and maintain such projects. For example, by proving the concept of both solar facilities the institutional pathways will be cleared for additional projects. As has been established, the political will is aligned to increase availability of low-emission power generation; however, the institutional and financial capacities are lagging. The successful implementation of the two solar PV projects will solidify a much-needed mechanism for future projects. A final paradigm shift is expected in the transition from CFL light bulbs to LED. Sustainable development potential: Over time, the new grid-level connections outlined above, are expected to lead to other important developmental behaviors including the use of clean cooking and lighting materials, and a reversal of deforestation efforts. These developmental behaviors should lead to positive economic behavior as children have adequate time to attend school, lighting for homework, and women increase their opportunity for additional economic activity. These behavioral trends were positively proven in a recent LEC study in the village of Pitseng, which had been recently connected to grid-power. It showed that most households took full advantage of their new opportunity. Though unscientific in its methodology, the study demonstrated that over time, households gradually adopted clean cooking methods (using electric stoves), consistently used electric lighting for evening activities such as homework, and some women purchased sewing machines to launch small businesses from their homes. Uptake of refrigeration and household heaters was also evident. Needs of the recipient: The burden to gather fuel for cooking, heating, and lighting, falls primarily on women and children. This activity can, and often does, take women away from other, more economically profitable, opportunities such as employment or even farming. Children often miss school to gather wood or farm waste to use for household fuel. When children are the orphaned heads of households, the burden is especially severe, as siblings take turns alternatively attending school versus gathering necessary fuel for the home. Furthermore, wood fuel is increasingly scarce, forcing those who gather wood to spend more and more time, and traveling greater distances to collect it. Besides the opportunity costs, many find themselves in danger at fuel gathering sites.15 In addition to these economic penalties, the health hazards of home-use of traditional fuels, is well documented. According to the World Health Organization, over 4 million people die prematurely from illness due to household air pollution from cooking with solid fuels. These cooking fuels produce high levels of household air pollution with a range of health-damaging pollutants, including small soot particles that penetrate deep into the lungs. In poorly ventilated dwellings, indoor smoke can be 100 times higher than acceptable levels for fine particles. Exposure is particularly high among women and young children, who spend the most time near the domestic hearth. Burning these fuels also exposes households to very high levels of fine particulate matter, as well introduces other health risks, e.g. burns, injuries and poisonings from fuel ingestion, constraining other opportunities for health and development, e.g. studying or engaging in small crafts and trades, which require adequate lighting.16 Finally, wood gathering practices have contributed to deforestation and other forms of environmental degradation. As a result, deforestation has become a serious problem. From 1990 to 2010, the country lost forest cover at the rate of 0.5 percent a year, largely due to rural household fuel demand.17 In 2012, Lesotho’s forested areas made up only about 1.6% of the country’s land area. With the demand for wood outpacing its supply, Lesotho has begun importing wood fuel and charcoal, effectively exporting deforestation. When wood or charcoal is not available, households turn to substitutes such as crop waste, dung, and Liquid Petroleum Gas (LPG). The use of crop waste and dung for heating and cooking deprive agricultural land of manure, contributing to a loss of soil fertility. Other fuels such as LPG are considerably more expensive and can put strains on household budgets. Country ownership: The projects submitted under this Concept Note fit squarely within the country’s national priorities, as reflected in Lesotho’s INDC, its National Energy Policy, and it’s (draft) Renewable Energy Policy. The INDC recognizes that the energy sector will require investments for “energy efficient equipment, grid extension, and rural electrification projects (off-grids and mini-grids) that are ultimately expected to reduce emissions significantly…Furthermore, energy efficiency has large mitigation potential in the residential sector. Households commonly use incandescent electric bulbs for lighting. Replacement of these bulbs with [more efficient bulbs] can save as much as 80% of electricity used for lighting…”18 Published energy sector mitigation aims include the following:19 • Promotion of renewable energy • Continuing to develop and promote uptake of renewable sources of energy, particularly wind and solar • Design and implementation of demand-side management techniques to encourage better use of existing distribution infrastructure and reduce peak demand. Published energy sector targets and assumptions are as follows:20 • Improving energy efficiency by 20% by 2020
15 Lesotho Department of Energy, Scaling Up Renewable Energy in Low Income Countries, 2017. 16 WHO, http://www.who.int/en/news-room/fact-sheets/detail/household-air-pollution-and-health). 17 GOL Ministry of Energy and Meteorology, Lesotho’s Intended Nationally Determined Contribution, Submission to UNFCCC, 2015. 18 GOL Ministry of Energy and Meteorology, Lesotho’s Intended Nationally Determined Contribution, Submission to UNFCCC, 2015. 19 Government of Lesotho, Lesotho Energy Policy 2015-2025, 2015. 20 Government of Lesotho, Lesotho Energy Policy 2015-2025, 2015.
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• Increasing electricity coverage/access to 35% of households in 2015, 50% in 2020, and 80% by 2030. • With increase in rural electrification, paraffin consumption is expected to come down from 30,434 kilolitres (2014) to 25,000 kilolitres in 2020 for a GHG savings of 12 Gg CO2e and 20,000 kilolitres in 2030 with a savings of 24 Gg CO2e. • Increase renewable energy sources by 200 MW by 2020 including at least 40 MW from solar. As has been established, the NDA is in excellent communication with the project sponsor, and enthusiastically supports the various aspects of the project suite. Furthermore, the NDA is participating in a cross-ministry task force, designed to provide regular feedback on project proposal documents, assist in project design and information gathering, and to communicate back to ministries.
C. Indicative financing / Cost information (max. 3 pages) C.1. Financing by components (max ½ page) Indicative GCF financing Co-financing cost Amount Financial Amount Instrument Name of Institutions Component (USD) (USD) Instrument (USD) Neo1, 20 MW Solar PV 27,800,000 10,240,000 REFIT (loan) 17,560,000 Equity / Loan AfDB / W.B. / IPP Neo2, 70 MW Solar PV 77,700,000 3,700,000 Loan 74,000,000 Equity / Loan China’s EXIM bank / GoL Maseru-Qacha Tx 50,077,000 16,077,000 Loan 34,000,000 Equity / Loan AfDB / WB / DBSA / GoL / LEC
Re-route Lesteng Line 12,000,000 2,400,000 Grant (adaptation) 9,600,000 Loan Local Bank
Repair dongas, Mafeteng 100,000 100,000 Grant 0 NA LEC Repair dongas, Maseru 300,000 300,000 Grant 0 NA LEC Indicative total cost (USD) 167,977,000 32,817,000 135,160,000
Figure 1: Illustrative diagram of financial and service flows for independent power provider (IPP)
C.2. Justification of GCF funding request (max 1 page)
Rational for GCF funding: GCF funding is being requested to bridge a financing gap that exists between the funding limits available from traditional sources, and what’s needed to accelerate the implementation of the projects. Each of the financial institutions listed below is available to provide funding. However, each also has availability limits due to the broad service obligations of the various entities. Therefore, participation by multiple institutions will be required. This will allow the GCF to play a leveraged role, “crowding in” co-financing from a variety of sources, that would otherwise not be able to mobilize toward these projects, due to a lack of sufficient project funding. Private financial institution availability: Financial institutions in Lesotho remain inadequate to support rapid, or significant, infrastructure investment. Part of the problem is a shortage of available financing with the long-term maturities required for infrastructure investment. Another issue is the small relative size of Lesotho’s economy. With a total GDP of just USD 2.2 billion, there are few resources to support investment. Gross domestic savings is sometimes an indicator of availability for internal funds to develop infrastructure. According to reports, Lesotho’s gross domestic savings is negative (USD -103 million); when matched with an estimated infrastructure need of USD 167 million, the difference illustrates a huge gap, of USD -271.21 Below is a brief outline of the relative strength, and assumed project contributions of LEC, the GoL, and AfDB.
21 Irving and Manroth, 2009, “Local Sources of Financing for Infrastructure in Africa: A Cross-Country Analysis,” World Bank. Available at, http://documents.worldbank.org/curated/en/767731468204565483/pdf/WPS4878.pdf.
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LEC funding availability: As mentioned, the LEC is primarily an electricity transmission and distribution operator. As such, it maintains a commitment to expand its connection service in both urban and rural areas. During each of the past two years the commitment has been for 15,000 households to be connected annually; these goals have been achieved, paid for by capital infusions from the GoL. According to the Statements of Changes in Equity (2016), and Cash Flows (2017) the government made a cash infusion of USD 8.8 million in 2016 and USD 19.7 million in 2017. In addition, it is assumed that LEC will be in a position to re- invest its annual profits into the projects that are listed within the proposal. For the past three years, net income after taxes has amounted to USD 6.1 million (2015), USD 4.6 million (2016), and USD 7.0 million (2017), for an average of USD 5.9 million. As these profits come after the performance of other system maintenance, the LEC estimates it can re-invest USD 5 million per year in the developments of the projects above, bringing the total allocated to USD 14 million. Government of Lesotho funding availability: As mentioned, the GoL has funded LEC approximately USD 28.5 million over the past two years. Moving forward, it is assumed that the government will be able to offer approximately USD 9 million per year, to facilitate new connections, including both transmission and distribution construction. According to the Government of Lesotho’s “Citizen’s Budget” report for 2018/19, the expected expenditures for the upcoming year are USD 1.6 billion, which represents a 6% increase over the past year. Government revenues come from internal resources and external grants and loans. The expected sources and amounts of funds for the coming year are presented in the following table. Table 5: Government of Lesotho's 2019 Budget Projections
Domestic Sources of Funds External Sources of Funds
Tax revenue Non-tax revenue S. African Customs Union Loans Grants
$664 million $124 million $449 million $99 million $92 million
Total domestic = $1.237 billion Total external = $191 million African Development Bank’s funding availability: The AfDB is currently evaluating a financing package that may bring up to USD 16 million, to these projects, through the Bank’s Sovereign Window. An additional USD 20 million may be available through partnership agreements with other infrastructure banks, such as the World Bank or the Development Bank of South Africa. The financing arrangements are still being investigated; However, a financing gap of at least USD 32 million remains. As each of the listed projects contains a climate mitigation and adaptation component and given the relatively low levels of national income for the country, it is hoped that the GCF will consider bridging the gap, with a financial package similar to what is outlined above. Alternative funding models: Alternative funding models include three other options. One is to increase the portion of funding from AfDB, placing a greater percentage of debt on that institution. This would likely delay the start dates for all projects under this proposal, as several tranches of funds would need to be approved, over time. A second alternative is to look to the local banking sector for full financing. However, banks are not accustomed, or often able to provide the amounts of capital required; this pathway would significantly slow the progress of project development. A third alternative is to delay the projects until the government budget can allocate the needed funds. This would delay project start dates even further, extending the roll out of pipeline projects well into the future. None of these three options is attractive. GCF Justification: Lesotho is a least-developed country (LDC) according to the UN Policy and Analysis Division. One characteristic of LDC nations is a very low levels of GDP per capita; for Lesotho this is US$ 3,900, which translates into a daily average living wage of $10 per person. Of course, these figures are highly skewed; widespread poverty entangles over 57% of the population. As a result, there is little margin for developing new programs, or for successfully managing structural damage due to climate change. Grant financing is being requested for the two donga repairs and for incremental costs for climate resiliency on rerouting the transmission line. The adaptation projects are required to adapt electricity infrastructure to the climate change experienced by the country. The case is made that apart from climate change, these adaptations would not be necessary. Since Lesotho has done very little to contribute to climate change, it is hoped that donor organizations might assist in helping the country adapt to its effects.
C.3. Sustainability and replicability of the project (exit strategy) (max. 1 page)
Technical sustainability will be ensured through the use of adaptation strategies that have relatively low levels of technical complexity and limited requirements for ongoing maintenance. The donga rehabilitations will be conducted with local labour, and landscaping methods that have been proven effective for the soils of the region and the emerging drought-flood cycles that the region is experiencing. These include drainage mechanisms, and tree planting to eliminate erosion. The Solar PV generation plans are being prepared and vetted by experienced Solar PV EPC contractors. The technical sustainability of the design of the generation sites will be confirmed during the drafting of the full proposal. The two transmission line designs will be carefully sited to avoid, as
PROJECT / PROGRAMME CONCEPT NOTE Template V.2.0 GREEN CLIMATE FUND | PAGE 12 OF 12 much as possible, sites that have a predilection to donga expansion. Where this appears to be a danger, additional landscaping, drainage and re-forestation efforts will be included. Environmental sustainability is a cornerstone of the project design. Two Solar PV sites reduce the reliance on imported energy that is primarily produced from coal. New transmission lines connect multiple villages (thousands of households), now burning wood and charcoal, to electricity sources that are far cleaner, produced with a generation mix that is sourced from over 75% clean renewables. Institutional sustainability will be ensured by fully involving national institutions and engaging local institutions. A stakeholder introduction has already taken place in Lesotho. During this introduction program sponsors met with all relevant ministries and agencies, to build support for the program, and listen to concerns. Additionally, a cross-ministry task force has been established that features participation from all relevant ministries. The task force is scheduled to meet monthly during the project preparation stage, to refine project components and proposal drafts, and to communicate important updates to their ministries. The project team is also in regular communication with other stakeholder groups. These include sponsors of these project and others, including private power producers, the Chinese EXIM bank, other AfDB departments, and DFIs involved in project delivery in Lesotho. Social sustainability will be ensured through the active and direct involvement of the populations impacted by, or at risk from, the planning, implementation, management and monitoring of all projects in the project suite. LEC will follow its normal procedure for access and land acquisition for linear infrastructure, and any other land requirements. Project designers are also exploring additional project components, especially around the transmission line projects, that would enhance the value of new grid connections. These components include specialized tariffs and/or connection charges for vulnerable households, and electric cook stoves to enhance the chances of uptake of grid electricity for cooking purposes. Financial sustainability is dependent on the various partners, including private parties, GCF, AfDB, Chinese EXIM Bank, and others to provide the necessary debt, equity, and guarantees for project success.
C.4 Engagement among the NDA, AE, and/or other relevant stakeholders in the country (max ½ page)
The NDA and a representative from the Accredited Entity (the African Development Bank) held a meeting on March 22, 2018. The project sponsor (LEC) was also in attendance. During the meeting the list of projects was discussed, as was the appropriate alignment across government sectors. The NDA enthusiastically embraces the project list and is currently highly involved in generating broad stakeholder support, gathering required data, and assisting with project refinement. The project sponsors remain in regular communication with the NDA, as does the Accredited Entity. Additionally, the NDA is part of the monthly task force meetings, that are hosted by the LEC (the NDA either participates personally or sends a delegate).