Combine water, granulated sugar, salt, and vegetable oil in a small saucepan over medium heat and bring to a boil. Remove from heat and stir in flour and peanut butter powder until just fully combined and it forms a dough ball.
Heat enough oil in a small fry pan to fill about 1′′ of the pan to 350-375°F. You can use a largerfry pan (or deep fryer), but it will require more oil. Place churro dough in apastry bag fitted witha star-shaped tip about 1/2′′ in diameter. If you choose a tip that is too big, the inside of the churro will not cook fully. Pipe about 4-5′′ strips of dough into the hot oil a couple at a time, pinching off the dough with your fingers as needed. Fry until golden and drain on paper towels.
Combine churro-coating ingredients in a plastic bag. Add in cooked churros and gently shake until all churros are fully coated. Alternatively, you can roll churros in the coating on a plate.
Peanut Butter Dipping Sauce:
Combine all ingredients and stir till smooth. Add more or less water as needed to make a smooth dipping sauce.