The risk problem with investors treating African energy as one market

By Vuyo Mafrika, head, global markets, client solutions – Africa regional offices; Chewe Chumanya, bank manager, Absa Zambia; and Opy Ramaremisa, head, client solutions, Absa CIB

The El Niño-linked drought that swept across Southern Africa in 2024 exposed the vulnerability of one of the continent’s most critical energy assets. Lake Kariba, which straddles the border between Zambia and Zimbabwe, fell towards some of its lowest usable levels in years as rainfall across the Zambezi Basin declined sharply.

Yet while the drought was a shared climatic event, its consequences were far from uniform. In Zambia, the crisis reverberated through a power system closely linked to copper production and mining expansion. In neighbouring Zimbabwe, it highlighted the constraints of an already strained and ageing electricity generation fleet.

The drought serves as a powerful reminder that the same event can have profoundly different implications across African markets. It also illustrates why energy investment risk on the continent cannot be assessed through a single continental lens.

There is little doubt that Africa’s energy sector represents one of the world’s most significant long-term investment opportunities. However, discussions about African energy often imply a level of uniformity that simply does not exist. Investors may speak about “Africa” as a single market, but projects are ultimately developed within individual jurisdictions, each with distinct regulatory, political, financial and operational realities.

Consider renewable energy development. In South Africa, investors are often less concerned about whether private generation is politically acceptable and more focused on whether projects can physically connect to the grid. Eskom’s transmission assessments have repeatedly shown that grid capacity in some of the country’s most attractive wind and solar corridors is already heavily constrained.

In Nigeria, however, the challenges are entirely different. Investors must contend with tariff politics, foreign exchange volatility, and weak collections by electricity distribution companies, all of which can materially affect project economics.

The complexity increases further when projects depend on regional infrastructure and cross-border electricity trade. While power interconnectors link multiple markets, their implementation is shaped by regulatory frameworks, operational standards, and institutional capacities that vary significantly between countries.

For investors, this means that risk cannot be understood solely at either a continental or national level. Successful investment requires both a detailed understanding of local market dynamics and a broader appreciation of how regional systems interact.

This reality has elevated the importance of what is increasingly referred to as jurisdiction-specific risk management.

In practical terms, this means structuring projects around the regulatory, financial, political and operational conditions of the specific market in which they are developed, rather than applying a standardised risk framework across multiple African countries.

Such an approach influences virtually every aspect of project development—from financing structures and currency hedging arrangements to tariff assumptions, power purchase agreements, political risk insurance, transmission planning, and engagement with local institutions throughout the life of the asset.

Historically, many investors have not always approached African projects with this level of localisation. However, one factor that is rapidly changing perceptions is financial market risk.

Foreign exchange risk, for example, is often discussed as though it were a universal challenge. In reality, it manifests very differently across African markets. The severity of exposure depends on factors such as currency liquidity, access to local-currency financing, convertibility frameworks and levels of dollarisation.

In markets with relatively deep financial systems, investors can manage currency exposure with a reasonable degree of predictability. In others, thin currency markets and restrictions on convertibility can make effective hedging difficult—or, in some cases, nearly impossible.

Interest rate risk presents another layer of complexity. The availability of credible long-term benchmark rates is critical for infrastructure financing. Where such benchmarks exist, investors can structure and price projects with greater confidence. Where they do not, uncertainty around future financing costs can significantly affect project viability.

Managing foreign exchange exposure has therefore become one of the most important aspects of energy project finance. Currency risk has the potential to undermine project economics long after construction has been completed.

Yet many conventional hedging instruments commonly used in developed markets are not always practical or affordable in African jurisdictions. Convertibility restrictions, limited derivatives markets and insufficient local-currency financing options frequently constrain developers’ ability to secure long-term protection against depreciation.

This often creates a structural mismatch: projects generate revenues in local currency while carrying debt obligations denominated in dollars or euros.

In response, more adaptive risk-management approaches are emerging.

In some markets, convertibility mechanisms are supported directly by central banks or facilitated through commercial banks with official backing. These arrangements can provide an additional layer of protection where local capital markets remain underdeveloped.

Elsewhere, developers are increasingly relying on contractual structures that better align pricing mechanisms, payment terms and currency exposures, helping reduce vulnerability over the lifespan of a project.

As renewable energy investment accelerates across the continent, traditional risk-management tools will need to be complemented by strategies that reflect the institutional and financial realities of each market.

One of the biggest mistakes investors can make, however, is viewing risk management as a process that ends once a project reaches financial close.

Energy assets often operate for several decades, while the political, economic and regulatory environments surrounding them can change multiple times over that period. As a result, active risk management is becoming an increasingly important component of long-term project success.

The more renewable energy investment expands across Africa, the more difficult it will become for investors to rely on broad continental assumptions. Instead, success will depend on a deeper understanding of how individual markets function, evolve and interact over time.

Business a.m.