Sub-Saharan Africa’s energy transition is not just a climate story; it’s also an economic one. For millions of people across the continent, electrification means gaining access to energy services for the first time. However, financing that transition remains a challenge; limited access to low-cost financing has made it difficult to mobilise the capital needed to scale. One key issue worsening this financing gap is the uncertainty and volatility arising from the mismatch between hard-currency investments and local-currency revenues, also known as currency risk. This post draws on a recent panel discussion which brought together investors and energy companies working in sub-Saharan Africa’s energy sector to discuss why currency risks could make or break Africa’s electrification drive.
In most developed countries and emerging economies, the energy transition largely means a transition of technologies: from petrol cars to electric vehicles, from gas heating to heat pumps, and from coal to renewables. However, in most sub-Saharan African (SSA) countries, it largely means something more fundamental: gaining access to electricity and relevant energy technologies (e.g. electric vehicles) for the first time. The IEA estimates that Africa needs around USD 15 billion per year in energy investment to achieve universal electricity access by 2035. In 2024, actual investment stood at just USD 2.5 billion – almost 6x less capital!
A major constraint to unlocking this capital is high financing costs, i.e. return expectations of investors for taking a risk to invest. For a quick comparison, public financing costs in SSA range between 3 – 19 %, while the those in Switzerland range between 3-5%. One major driver for such high financing costs in some SSA countries is currency risk.
To explore this issue, I (Churchill) organised a panel discussion on electrification and currency exposure, bringing together investors, entrepreneurs, and researchers. The panel featured Tobias Ruckstuhl, an investor focused on climate startups in African frontier markets; Céleste Tchetgen Vogel, Founder and CEO of eWAKA Mobility, an electric mobility company operating in Kenya, Rwanda and Burundi; and George Appiah, co-founder of Solar Taxi, an electric vehicle assembly and distribution company based in Ghana. Together, their perspectives reveal a systemic challenge that the energy finance community has yet to fully reckon with. In this blog post, we share some key messages learned from the panel discussion.
Currency risk and the foreign investor’s dilemma
Currency risk refers to the uncertainty and volatility brought about by the mismatch between hard currencies and local currencies. “Hard” currencies (HCY), like the US dollar, euro, or yen, are strong, globally traded, and liquid. “Local” currencies (LCY) are the currencies of developing economies, which often tend to be more volatile and comparatively less liquid, making them weaker. International investors providing capital for energy technologies in SSA, typically invest in HCYs and often expect returns in HCYs as well. This becomes a challenge when investments are made in countries with weak local currencies. The consequent exposure to the risks brought about by this mismatch carries a hefty price. Investors are therefore often confronted with the decision to either 1. absorb this risk by pricing it into their financing costs, 2. to hedge against exposure to the risk through currency risk mitigation solutions such as currency swaps, derivatives etc or 3. to derisk investment through blended finance solutions such as guarantees and blended finance. As for the companies on the receiving end of the investment, currency risk exposure can be make-or-break (listen to opening segment of this podcast for an example of how currency risk alone almost led to a Nigerian company’s bankruptcy).
Broadly speaking, currency risk is multi-layered and materialises in different forms but in this blog post, we focus on the risk that was most heavily discussed during the panel discussion: currency depreciation/devaluation. Depreciation is driven by natural market forces like supply and demand, while devaluation is an intentional decision made by a government or central bank. In both cases, when LCYs weaken against an HCY, it becomes more expensive for companies or project developers to repay the same amount of HCY to foreign investors. Currently, in the off-grid electricity sector (mainly for rural electrification) and electric vehicle sector, the risk gets passed on to consumers through pricing it in the energy service e.g. tariffs or product price, making clean energy products more expensive. Céleste highlighted this very challenge: the historically depreciating Kenyan shilling adds significant pressure to her company’s finances.
Solutions for currency depreciation/devaluation exist, but each comes with its own costs.
- Hedging: Investors or businesses can pay a specialist provider to absorb the currency risk, to insure the investor or the company/project developer against currency swings e.g. through currency swaps or FX forwards offered by actors such as TCX & MFX. This is technically available but prohibitively expensive for most African startups already working with thin margins.
- Local currency financing: Investors can provide capital that is denominated in LCY, which eliminates currency depreciation risk as the currency risk mismatch disappears. However, investors in this case become fully exposed to the local macroeconomic environment. As Céleste pointed out, local commercial banks can sometimes have even higher risk perception of local businesses compared to international investors and DFI, thus charging higher financing costs and more restrictive lending terms. For example, George recalled paying a 5% premium on his local currency financing cost just to compensate local lenders for currency risk. Further, if development ultimately requires importing equipment in HCY, a fully local-currency financing model simply shifts the currency risk from the entrepreneur to the bank, discouraging banks from providing such services.
Confronting the inconvenient truth about currency risk
At the end of the session, we all left with many questions that must be addressed but are admittedly hard to answer. One key question especially stood out: Who should bear the uncertainty and volatility of currency risk exposure in the deployment of clean energy technologies? As Céleste summarised, currency risk, as it stands, is a structural feature of cross-border financing. For example, even if LCYs can become relatively stable (like the Kenyan shilling has been over the past two years), the uncertainty of future exchange rate movements continues to be reflected in the pricing financing costs. For such a structural issue, this raises the need for an important and honest discussion about how currency risk should be allocated among lenders, investors, DFIs, and entrepreneurs. Perhaps, the conclusion might unfortunately just be to pass the costs onto consumers, or perhaps DFIs might step up to take on these risks. Or maybe completely new financial institutions will emerge, with the ability and mandate to develop tailored currency risk mitigation solutions needed?
