Macroeconomic indicators¹

The economy showed signs of recovery in 2017/18, with real GDP growth estimated at 0.9% following a 2.3% contraction in 2016/17. Growth was constrained by the slow recovery of South Africa’s economy and a 27% decline in receipts from the Southern African Customs Union (SACU) in 2016/17, which have not yet fully recovered.

The fiscal deficit improved to an estimated 3.7% in 2017/18 from 4.0% in 2016/17, due to fiscal consolidation. Recurring fiscal deficits largely reflect declining SACU revenue (which constitutes 50% of Lesotho’s total revenue) and a huge wage bill (about 24% of GDP— three times the Sub-Saharan average) that crowds out capital spending and spending on goods and services.

To diversify revenue sources, the government has introduced a simplified tax regime and simplified procedures for small taxpayers. With external debt estimated at 39.3% of GDP in 2018, Lesotho has a moderate risk of debt distress. Lesotho maintains parity between its currency, the loti, and the South African rand. Since July 2018, the central bank policy rate has been set at 6.5%, compared with 7% in the second half of 2017. Inflation has fallen from its peak of 6.8% in 2015/16 to an estimated 4.8% in 2017/18, despite high energy prices.

The current account deficit reached an estimated 2.8% in 2017/18, down from 6.5% in 2016/17, owing mostly to increased diamond exports in response to favorable international prices. The government’s international reserves currently cover almost 3.1 months of imports.

¹ Source: African Economic Outlook (AEO) 2019

Business environment and private sector development²

Lesotho continues to rank low in important indicators of private sector development. The Government acknowledges that an uncompetitive business environment is one of the most binding constraints to private sector development. Competitiveness rankings and other investment climate diagnostics indicate that there are persistent major constraints to private sector growth. These challenges include inadequate infrastructure, cumbersome business procedures, poor customs administration, insufficient access of small and medium-sized enterprises to finance, high energy costs, lack of equitable and effective regulation and enforcement, lack of capacity in government to implement reforms, as well as skills gaps in certain economic sectors. Lesotho’s ease of doing business is ranked 122 out of 190 countries in the 2020 World Bank Doing Business Report (from 106 in 2018)³ .

The authorities remain committed to improve the business climate and to support private sector-led growth and economic diversification. Recent structural reforms undertaken by the authorities include the enactment of the new Companies Act 2011 in June 2012, the implementation of a new business plan for the One-Stop Business Facilitation Center, and the finalization of the Industrial Licensing Bill. These and other reforms are important for investment and job creation. However, the skills shortage is still a serious problem. Investment in skills development should continue to receive high priority. Labor productivity remains an integral driver of Lesotho’s long-term growth and will grow in importance as the economy diversifies and moves up the agricultural, manufacturing, mining, and service sectors value chains.

²Source: AfDB Country Strategy Paper for Mali 2013-2017

Key takeaways on the electricity sector

Electricity access

Lesotho’s total population access to electricity reached 43,1% in 2017. In urban areas, the access rate is about 87,2%. The rural area's level of access is still low at 11,7% in 2017, although increasing since 2013 (<1%). See the table below.

Population Access to Electricity, 2013-2017

Source: WB Tracking SDG7

Installed capacity

Installed generation capacity was recorded at 75.7 MW in 2018, of which Hydro generation accounts for 98.9%, Diesel for 1.1%, and Solar for 0.7%. The following table shows the breakdown of the generation capacity per technology and related power stations.

Installed Generation Capacity in 2018 (in MW)

Source: IRENA, BOS, and various sources

Production

The evolution of electricity generation (in GWh) over the period 2013-2017 is shown in the table below.

Evolution of Electricity Generation, 2011-2018 (GWh)

Source: AFREC Database

Production costs

The long-run marginal cost of supply, which is the level of electricity price that ensures the utility company can meet its production costs in the long term, is estimated at 1.473 M/kWh, i.e., USD cents 11 per kWh⁴.

Maintenance⁵

Over the past years, more than 80% of planned maintenance was completed by LEC. In 2019, LEC performed maintenance of the Muela Hydro Power Station system that required the shut-down of the provision of electricity from the station. As Muela station provides more than 95% of the country’s electricity generation, the shutdown of the electricity supply was scheduled in close tandem with ESKOM to ensure a normal provision of electricity. The Muela system maintenance lasted about two months, characterized by minimum load-shedding management to keep the demand within the capacity determined by ESKOM.

Downtime and efficiency⁶

During the fiscal period 2016/2017, the number of network faults experienced on the transmission systems and their restoration is illustrated on the following table.

Source: LEC Annual Report 2016/2017

The above table shows that 85.5% of all outages were restored within four hours, while only 14.5% of outages were restored within 24 hours. No outages were restored beyond 24 hours.

On average, the system losses improved from 13.2% to 12.9% between 2016 and 2017. The trend was attributed to the implementation of a robust revenue protection strides including but not limited to: spot-checks targeted inspections to areas where pilfering is suspected and in-depth analysis of the consumption data.

Tariffs

The following table shows LEC approved electricity charges for 2016/2017.

Approved LEC Energy charge (including levies) by type of consumer, 2016/2017 (M/kWh)

Source: LEC Annual Report 2016/2017

⁴Source: Lesotho Electricity Supply Cost of Service Study
⁵Source: LEC
⁶Source: LEC Annual Report 2016/2017

Country strategy on the environment and climate change

Policy and regulation

The government is developing its second National Strategic Development Plan for the period 2019-2023 (NSDP II). NSDP II mainstreams Climate Change, Environment, Gender, and Social Inclusion across all sectors. These are crucial for the realization of inclusive growth. Climate change has implications for employment creation and economic growth since its impact on various economic sectors such as agriculture, health and nutrition, tourism, and natural resources has been well established. Therefore, the NSDP II strategy for employment creation and growth will take cognizance of climate change mitigation and adaptation.

Environment

The Constitution of Lesotho provides the mandate on environmental management. Section 36 of the constitution allows for the adoption of policies designed to protect and enhance the natural and cultural environment of Lesotho for the benefit of both present and future generations. It also facilitates endeavors to assure all citizens a sound and safe environment adequate for their health and well-being. To this extent, the government of Lesotho formulated the National Environmental Action Plan (NEAP) in 1989. The NEAP provides a framework for the integration of environmental considerations into the planning and decision-making process for social and economic development.

Climate change

The Ministry of Natural Resource, through its Meteorological services, developed a Policy Formulation on the Transfer of Science and Technology for Adaptation to Climate Change in 2004. The policy on science and technology encompasses the following core elements: (i) the promotion of a science and technology culture, infrastructure and links; (ii) the facilitation of access to up-to-date, reliable, and cost-effective science and technology; (iii) the full exploitation of the country’s natural and human resources and science and technology investments; (iv) the equitable distribution of science and technology benefits; and (v) the promotion of standards and mutual respect for intellectual property, including indigenous knowledge systems.

Regional integration with the Southern African Power Pool (SAPP)

2018 Highlights

Lesotho is an active member of the SAPP regional market through Lesotho Electricity Company (LEC) as an operating member. The following table shows the SAPP utility generation mix for the year 2018.

Integration challenges

Reduction in load-shedding - This year (2018), the aggregate peak demand for SAPP Operating Members (excluding non-operating members) was 47,495 MW against an operating or available capacity of 57,045 MW. This peak demand is a simple summation of peak demands of individual member power systems usually occurring at different times. The peak demand excludes loads that were curtailed or reduced mainly due to generation capacity constraints and, in isolated cases, due to insufficient transmission capacity. Compared with the previous year, the peak demand rose by 3,993 MW. It was attributed partly to the commissioning of a new generation, especially in South Africa and Zambia, and partly to improved hydrology in the Zambezi catchment area, which resulted in a considerable reduction of load-shedding in the region.

Updating of the SAPP Methodology for Handling Energy Interchange Imbalances - The SAPP implemented the power-frequency-based methodology for handling energy interchange imbalances in the year 2010. Over the years, some issues that were not pertinent at the very beginning cropped up. These included: (i) imbalances caused by tripping of generation on over-frequency protection in one area following a disturbance in another area; and (ii) interruption of scheduled interchange mid-way in an hour or several minutes from the top of the hour, having already delivered some energy. Therefore, on 24 April 2017, the SAPP Markets Sub-Committee (MSC) and the Operating Sub-Committee (OSC) met jointly in Johannesburg, South Africa, and resolved cross-cutting issues on the handling of inter-Control Area energy imbalances. The joint meeting also developed a procedure for handling intra-Control Area energy imbalance within a Control Area. The developed procedure would apply where there are no bilateral arrangements for handling intra-Control Area energy imbalance between SAPP members.

Quality of Power Supply - Power quality issues are becoming more prominent to regulators, power utilities, and customers. A few years ago, the OSC formed a working group on power quality. The working group developed a SAPP standard for power quality as well as a specification for a SAPP power quality meter. By the end of the period under review, power quality meters were installed on almost all interconnectors in SAPP. Monitoring and measurement of power quality were being done. ZESCO, Eskom, SEC, EDM, NamPower, CEC, HCB, and BPC also installed central online databases for power quality. SAPP members agreed to focus on the identification of common power quality problems and associated mitigation measures.

Clashing imperatives

Some of the SAPP member countries have outlined their emissions targets and initiatives they will be putting in place to adapt to the impacts of climate change, including the required means of implementation. However, the SAPP is committed to continuing development in a sustainable manner that results in a benefit to the economy, society, and the environment. The SAPP's approach is to contribute to global efforts to combat climate change while ensuring the sustainability of the region's economies. Climate change efforts specific to SAPP activities are coordinated by the SAPP Environmental Sub-Committee, subject to oversight by the SAPP Management Committee.

Network integration

Currently, the SADC region is not fully integrated as Angola, Malawi, and the United Republic of Tanzania are not connected to the regional power grid. Approved by SADC leaders at their 32nd Ordinary Summit held in August 2012 in Mozambique, the Energy Sector Plan of the Regional Infrastructure Development Master Plan (RIDMP), covering the period 2012 to 2027, is an ambitious program to develop cross-border infrastructure in the region. Some of the planned transmission lines are the Zimbabwe-Zambia-Botswana-Namibia (ZiZaBoNa) interconnector project, the Malawi-Mozambique interconnector project, the Mozambique-Zimbabwe-South Africa (MoZiSa) transmission project and the Zambia-Tanzania-Kenya interconnector project. Most of the SADC regional interconnection projects that are under consideration by the AfDB are contained in the RIDMP.

The following table indicates the chronology of the existing power network in the region.

Chronology of regional power network integration in Southern Africa

Source: SAPP and various sources

Regional electricity market⁹

Traditionally, SAPP utility members are mainly trading electricity (about 90-95% of energy trade) through fixed co-operative bilateral contracts. In April 2001, the SAPP introduced the short-term energy market (STEM) as a precursor to a fully competitive market. The STEM was designed to allow for the trading of electricity on a shorter timeframe between SAPP members (in addition to bilateral contracts). The development of the competitive electricity market started in January 2004 when an Agreement between the Government of Norway and SAPP provided SAPP with a grant to the amount of NOK 35 million for this purpose. Under this Agreement, NordPool developed the ‘Day-Ahead Market’ (DAM) trading platform for the SAPP. The goals of the SAPP DAM are to (i) establish an efficient & competitive marketplace, and (ii) ensure that consumers benefit from the market. The SAPP DAM replaced the STEM market in 2009 and operated as a firm energy market that trades (via double-sided auction process) hourly energy contracts for the following day inclusive of existing bilateral contracts (cleared first), transmission capacity constraints, and wheeling fees. Since December 2015, the SAPP market architecture was updated with several new sub-markets established. The sub-markets included in this new SAPP market architecture are:

• Bilateral contracts: To meet long-term energy supply-demand balance between market participants. This sub-market pre-dates the establishment of the SAPP and has been the legacy sub-market within which most electricity trading in the SAPP occurs.
• Forward Physical Market Monthly (FPM-M): A sub-market where market participants can trade either an Off-Peak product for a single month (same volume and price in Off-Peak hours for the month) or a Non-Off-Peak product for a single month (same volume and price in Non-Off-Peak hours of the month). It is a sub-market that acts as a bridge between bilateral contracts and the FPM-W (outlined next) and has been operational since April 2016.
• Forward Physical Market Weekly (FPM-W): It is a sub-market where market participants can trade Off-Peak, Standard, and Peak products for a particular week (with the same volume and price for all Off-Peak, Standard and Peak hours of the week respectively). It is a sub-market that acts as a bridge between the FPM-M and Day-Ahead Market (DAM) and has been operational since April 2016.
• Day-Ahead Market (DAM): An open and competitive sub-market traded on a day-ahead basis (can forward bid up to 10 days if desired) to meet short-term supply-demand balances between SAPP market participants.
• Intra Day Market (IDM): It is a sub-market that allows market participants to trade up to one hour before delivery. The IDM matches market participants automatically on a first-come-first-serve basis if a seller’s offer price is less than a buyer’s bid price and a seller’s volume is lower (or equal to) a buyer’s volume.

Between April 2016 and January 2017, the SAPP market revenues amounted to USD 69 million, with the following market share: DAM (74%), FPM-W (11%), FPM-M (8%), and IDM (7%). The SAPP market average prices were as follows: Off-Peak (3-6 USDc/kWh), Standard (4-10 USDc/kWh), and Peak (10-14 USDc/kWh).

⁹Source: SAPP and various sources

Mapping of current stakeholders across agreements

Source: SREP Investment Plan for Lesotho, N.A. Information not available

Electricity Regulatory Index

Regulatory Assessment

The Electricity Regulatory Index for Africa (ERI) is a flagship publication of the Power, Energy, Climate Change and Green Growth Complex of the African Development Bank, which seeks to empirically evaluate the performance of African utility regulators, benchmark their performance against international best practices as well as a peer-to-peer comparison of their performance. Lesotho participated in the ERI surveys 2018 and 2019. Over 34 participating countries in the 2019 survey, Lesotho ranked 24th with an overall score of 0.513, which denotes that some elements for a supportive regulatory framework are established, although with weaknesses that do not permit the regulator to have the substantial capacity, legal and institutional structures. The overall score of Lesotho in 2018 was 0.481.

The 2019 results are displayed in the table below:

ERI 2019 insights

• Regulatory governance: Lesotho’s high score denotes that many elements of a supportive regulatory framework are in place, despite some weaknesses in legal and institutional structures. Lesotho’s scores on sub-indicators like independence from Government and Stakeholders are below the average of the sample study. Independence of the regulator is an area that needs improvement in Lesotho.
• Regulatory substance: The score indicates a medium level of the regulatory development characterized by implementation constraints, institutional gaps, and low capacity. Lesotho’s economic regulation sub-indicators are below the average score of the sample study. One of the areas of improvement is the development of capacity on the implementation of tariff-setting guidelines.
• Regulatory outcome: On the regulatory outcome sub-index, Lesotho's low score is due to two main sub-indicators: (i) the sub-indicator related to the promotion of electrification; and (ii) the sub-indicator measuring the ability of the utility to deliver on the technical and commercial quality of electricity supplied to end-users, which is considered reflective of the regulator’s capacity to enforce sound regulation over the sector.>

The first edition (2018) of the study is available here and the 2019 version

The ERI 2019 regulatory index

National utility

General profile¹²

The Lesotho Electricity Company (LEC) is a 100 percent government-owned entity established under the Electricity Act 7 of 1969 to supply environmentally friendly electricity to the people of Lesotho. Before LEC coming to fruition, electricity provision in the country was under the control of the Government of Lesotho. A small coal-fired generating plant provided the service mentioned above, used to supply a limited number of domestic customers located within the Maseru West and Old Europa areas.

In the present day, LEC maintains three bilateral bulk supply agreements with LHDA, ESKOM of South Africa, and Electricidade de Moçambique (EDM) for its bulk electricity supply. LEC is primarily an electricity transmission and distribution operator, although it has its own small generation facilities: the 180 kW Semonkong hydropower plant (with 500kW diesel generator), and the 2 MW Mantsonyane hydro plant.

Policy and strategy¹³

LEC’s vision is to “be a benchmark of excellence in the provision of electricity”. Its strategic mission is to provide reliable, safe, environmentally friendly, and quality electricity for sustainable economic growth and improved quality of life for the people of Lesotho. LEC operates under six strategic goals, which are:

(i) To promote customer-focused business;
(ii) Improve security and quality of supply;
(iii) Promote healthy corporate governance;
(iv) Promote staff welfare and development;
(v) Promote research and development; and
(vi) Increase customer base and ROE

LEC key figures

The table below summaries the energy purchased and generated from different suppliers and intake points over the period 2014/2015 to 2017/2018¹⁴.

Bulk Purchases (GWh)

Sources: LEC Annual Reports, Bureau of Statistics Energy Reports and LEWA Annual Reports

Electricity generated (GWh)

Transmission Network¹⁵

The Transmission network evacuates power from the generation sources namely 'Muela Hydropower (LHDA), Eskom (South Africa) and EDM (Mozambique) to LEC load centres. The supply from 'Muela and Eskom plus EDM (at Maseru intake) is transmitted through the 132kV lines to Maputsoe Substation and Mabote Substation respectively. The supply from Eskom (Clarence intake) enters Lesotho through 88kV line at Khukhune Substation in Butha-Buthe, while Qacha's Nek intake is through 22kV line from Matatiele. The transmission lines are of voltage levels 132kV, 88kV, 66kV and 33kV.

Distribution Network¹⁶

The Distribution network distributes power from substations to electricity users. The Distribution network ranges from the voltage of 11kV up to the customers supply at 220V and 380V.

Approved LEC Maximum Demand Charge for 2019/20 (M/kVA)

Source: LEWA

Approved LEC tariff Levels for 2019/20 by LEWA Board

Source: LEWA ; Notes: 1/ At M0.0423/kWh ; 2/ At M0.02/kWh for large customers and M0.035/kWh for others.

¹²Sources: LEC Annual Reports, Bureau of Statistics Energy Reports; Note: - Not available
¹³Source: LEC Strategic Plan - Abridged
¹⁴Fiscal year, April YR-1 to March YR.
¹⁵Source: LEC
¹⁶Source: LEC

Mapping of ongoing power programs and projects

Source: AfDB and Lesotho Energy Program under the GCF fund

Investment opportunities for the private sector

Some large-scale PV and wind projects are currently promoted and studied by private investors, which may lead to several public-private partnerships (PPP) or independent power producers (IPP) in the next few years. The following table shows a summary of renewable energy technical potential that private investors can tap into.

Summary of RE Technical Potential¹⁷

¹⁷ Source: See SREP Investment Plan for Lesotho for more details on the technical potential assessment.

Contact information of local donor representations

About opportunities in the country

²³ Source : SREP Investment Plan for Lesotho
²⁴Source: See SREP Investment Plan for Lesotho for more details on the technical potential assessment.

About private sector participation

⁴⁵ Lesotho Investment Policy Review (UNCTAD)