The currency risk challenge in African power finance: Structures, politics, and emerging responses

Motivation Achieving Africa's energy and infrastructure goals requires unprecedented investment, but reliance on foreign currencies in project finance exposes governments and utilities to systemic currency risk. Purpose This article explores the structural, financial, and political economy dimensions of currency mismatch in African power projects, and those executed by (private sector) Independent Power Producers (IPPs) in particular, where revenues are in local currency, but debt obligations are in hard currency. It argues that traditional solutions, such as sovereign guarantees and hard‐currency power purchase agreements (PPAs), are increasingly unsustainable, exacerbating fiscal vulnerabilities and undermining long‐term resilience. Approach and methods The article examines the state of local capital markets across Africa, the evolution of PPA structures, and the consequences of unmanaged foreign‐exchange risk on utilities, consumers, and governments. Through illustrative case studies, it sketches the limitations of prevailing models and highlights emerging alternatives, including local‐currency PPAs, partial indexation mechanisms, hedging instruments, guarantees, and blended finance solutions. Findings and policy implications Traditional approaches, including hard‐currency PPAs, sovereign guarantees, and full currency indexation, have supported project bankability but increasingly impose unsustainable fiscal and political burdens on host countries. Local‐currency solutions offer a more resilient alternative, but their feasibility depends on the country's context, domestic financial depth, institutional capacity, and the availability of concessional risk‐sharing mechanisms. Focussing in particular on TCX, GuarantCo, and related instruments, the paper argues that currency risk mitigation must be embedded in procurement design, development finance institution mandates, and domestic capital market development. It concludes with recommendations for governments, donors, DFIs, and domestic financial actors to enable a shift toward a locally anchored, fiscally responsible, and more developmentally aligned investment architecture.