CURRENCY RISK IN CROSS-BORDER ENERGY INVESTMENT

1. Introduction

Currency risk in cross-border energy investment refers to the possibility that fluctuations in exchange rates, currency devaluation, restrictions on foreign-exchange conversion, or inability to transfer funds across borders may adversely affect the economic value and profitability of an energy investment. This issue is particularly important in international energy projects because financing, construction costs, debt servicing and revenues may be denominated in different currencies.

For example, a foreign investor may finance a power plant through US-dollar loans while the electricity generated by the project is sold in the host country's local currency. If the local currency depreciates substantially against the US dollar, the investor's debt-servicing burden increases while its local-currency revenues may remain unchanged. Currency risk therefore has both financial and legal consequences.

2. Nature of Currency Risk in Energy Projects

Cross-border energy projects commonly involve several currencies. Equipment may be purchased in US dollars or euros, financing may be obtained from international lenders, and electricity or gas revenues may be received in the host country's currency.

The principal forms of currency risk include:

Exchange-rate fluctuation – changes in the value of one currency against another.

Currency devaluation – a sudden decline in the value of the host-state currency.

Convertibility risk – restrictions preventing conversion of local currency into foreign currency.

Transfer risk – restrictions on transferring profits, dividends or loan repayments abroad.

Inflation risk – domestic inflation may reduce the real value of local-currency revenues.

Foreign-exchange control risk – government measures may restrict access to foreign currency.

These risks can substantially affect the financial viability of power plants, renewable-energy projects, pipelines, oil and gas investments and electricity-transmission infrastructure.

3. Contractual Allocation of Currency Risk

A central legal question is who bears the exchange-rate risk.

Energy contracts may contain:

foreign-exchange adjustment clauses;

tariff-indexation mechanisms;

currency-conversion provisions;

stabilization clauses;

hardship clauses;

force-majeure provisions;

change-in-law clauses; and

termination or renegotiation provisions.

A carefully drafted Power Purchase Agreement (PPA), concession agreement or investment agreement can allocate currency risk between the investor, government, procurer and consumers.

Where the contract expressly places foreign-exchange variation upon the investor, courts and regulators are generally reluctant to rewrite the bargain merely because exchange rates subsequently become unfavorable.

4. Sasan Power Ltd. v. CERC (2022)

An important Indian energy-law case is Sasan Power Limited v. Central Electricity Regulatory Commission, decided by the Appellate Tribunal for Electricity.

Sasan Power sought compensation because of substantial depreciation of the Indian Rupee against the US Dollar, arguing that the depreciation was unprecedented, unforeseen and uncontrollable and had adversely affected the economics of its coal-fired Ultra Mega Power Project.

The case concerned a tariff established through competitive bidding under Section 63 of the Electricity Act, 2003. The contractual framework specifically allocated Foreign Exchange Rate Variation (FERV) to the selected bidder. The Tribunal ultimately held that the regulatory power under Section 79(1)(b) could not be used to vary or modify a competitively bid tariff.

The case is highly significant because it demonstrates that currency depreciation does not automatically entitle an energy producer to compensatory tariff relief. The contractual allocation of exchange-rate risk remains extremely important.

5. Energy Watchdog v. CERC (2017)

The Supreme Court's decision in Energy Watchdog v. Central Electricity Regulatory Commission is also relevant to currency-risk analysis.

The case established important principles concerning contractual force majeure, change in circumstances and the limits of regulatory intervention in electricity contracts. The Sasan litigation subsequently referred to the Energy Watchdog judgment when considering the consequences of foreign-exchange variation.

The broader principle is that commercial difficulties do not automatically permit a party to escape contractual obligations. The precise wording of the PPA and the applicable statutory framework remain decisive.

6. Forasol v. ONGC

In Forasol v. Oil & Natural Gas Commission, the dispute arose from an oil-exploration contract involving payments in French francs. During the period of the contract, the Indian currency was devalued, resulting in a dispute concerning the appropriate conversion rate.

The Supreme Court recognised the importance of the contractual currency arrangement and examined the consequences of currency conversion and devaluation. The case is significant for international energy contracts because it demonstrates that the currency in which contractual obligations are expressed can have substantial legal consequences when exchange rates change.

7. CMS Gas Transmission v. Argentina

The international investment-arbitration case CMS Gas Transmission Company v. Argentina (ICSID Case No. ARB/01/8) is one of the most important examples of currency risk in the energy sector.

CMS had invested in an Argentine gas-transportation enterprise under a regulatory framework in which tariffs were calculated in US dollars and subject to adjustment mechanisms. During Argentina's economic crisis, the government abandoned the currency peg and converted dollar-based tariffs into pesos ("pesification"). CMS argued that these measures fundamentally damaged its investment.

The ICSID Tribunal found Argentina responsible for breaches of the applicable US-Argentina BIT, including fair and equitable treatment obligations. UNCTAD records that the dispute specifically concerned Argentina's suspension/termination of dollar-based tariff calculations and inflation adjustments.

The case demonstrates that currency measures can become an international investment-law issue when governmental action fundamentally alters the economic and regulatory framework on which an energy investment was based.

8. Legal Protection Available to Investors

Depending upon the applicable treaty and contract, investors may rely upon:

Fair and Equitable Treatment (FET);

protection against unlawful expropriation;

legitimate-expectations principles;

contractual stabilization clauses;

umbrella clauses;

free-transfer provisions; and

dispute-resolution or international-arbitration mechanisms.

However, currency depreciation caused by ordinary market conditions will not necessarily constitute a treaty violation. A distinction must be made between commercial currency risk and government-created currency restrictions or regulatory interference.

9. Risk-Mitigation Mechanisms

Cross-border energy investors commonly manage currency risk through:

currency hedging;

foreign-currency denominated tariffs;

exchange-rate adjustment formulas;

indexation clauses;

currency-matching of revenues and debt;

political-risk insurance;

stabilization clauses;

government guarantees; and

international investment treaties.

The most effective legal protection is usually obtained through clear contractual allocation of foreign-exchange risk before the project begins.

10. Conclusion

Currency risk is a fundamental component of cross-border energy investment because energy projects are long-term, capital-intensive and frequently dependent upon international financing. Exchange-rate movements can affect construction costs, debt servicing, tariffs, profitability and the ultimate value of the investment.

The cases of Sasan Power v. CERC, Energy Watchdog v. CERC, Forasol v. ONGC and CMS Gas Transmission v. Argentina demonstrate that currency disputes may arise under contract law, electricity regulation, arbitration law and international investment law.

The central legal principle is that currency risk must be distinguished between ordinary commercial risk voluntarily assumed by the investor and extraordinary governmental measures that fundamentally interfere with the investment's economic or legal framework. Consequently, precise currency-adjustment provisions, stabilization mechanisms and carefully drafted dispute-resolution clauses are essential elements of cross-border energy investment.