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

Achieving Africa’s energy and infrastructure goals requires unprecedented investment, but foreign currency reliance in project finance exposes governments and utilities to systemic currency risk. This working paper explores the structural, financial, and political economy dimensions of currency mismatch in African power projects, and those executed by so-called (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. The paper 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 detailed case studies, it illustrates the limitations of prevailing models and highlights emerging alternatives - including local currency PPAs, partial indexation mechanisms, and innovative risk mitigation tools. Focusing in particular on TCX (The Currency Exchange Fund), the study evaluates its potential to scale hedging solutions across frontier markets, and outlines how procurement reform and blended finance can integrate FX risk management into project design. The paper concludes with a set of actionable recommendations for governments, donors, DFIs, and domestic financial actors to enable a shift toward a new investment architecture - one that is locally anchored, fiscally responsible, and better aligned with the goals of universal access and a just energy transition.