Currency risk (i.e. exchange rate risk) is a significant and persistent barrier to clean energy infrastructure in emerging markets and developing economies (EMDEs). Given the long-term asset life span of renewable energy projects, the global supply chains involved in clean energy technologies, and the non-storable nature of the electricity sector, significant changes in currency value can frequently arise and can have a detrimental impact on the viability of renewable energy projects. Additional macroeconomic and geopolitical risks in EMDEs compound this issue, creating uncertainty that can deter investors – especially institutional investors from OECD and G20 countries – from otherwise bankable projects with predictable cash flows.
Currency risk management tools such as forwards, swaps, and options are available in emerging economies, but they come with several caveats and associated costs that must be carefully managed to ensure project viability. These include, high costs, especially in volatile markets with less developed financial systems; limited duration (up to 5 years) making them unsuitable for long-term clean energy projects that require stable and predictable financing due to high upfront capital expenditure; and inaccessible to small businesses due to both cost and complexity.
Notable efforts advocating for more local currency financing have been growing across all regions, adopted by institutions such as the International Finance Corporation (IFC), the African Development Bank (AfDB), the Asian Development Bank (ADB), and the G20. Yet, the implementation of these solutions faces significant challenges, including market inefficiencies, liquidity constraints, underdeveloped regulatory frameworks for advanced hedging instruments, and operational complexities.
The objectives of this roundtable discussion were:
- To explore potential strategies to mitigate foreign currency risk and unlock private, particularly institutional, investment to support a just, clean energy transition in EMDEs;
- To identify priorities to deepen local capital markets and enhance local currency financing.
The session was held under Chatham House Rule.