The carrier dynamics of Al‐rich AlGaN/AlN quantum well (QW) structures in the presence of strong carrier localization is reported. Excitation density‐dependent photoluminescence (PL) measurements at low temperatures reveal a clear correlation between the onset of efficiency droop and the broadening of the time‐integrated PL spectra. While the droop onset is heavily impacted by the localization strength, the PL emission broadening is observed almost exclusively on the high energy side of the emission spectrum. Spectrally resolved PL decay transient measurements reveal a strong dependency of the carrier lifetimes on the emission photon energy across the spectrum, consistent with a distribution of localized states, as well as on the temperature, depending on the localization strength of the investigated structure. The characteristic “S”‐shaped temperature dependence of the PL emission energy is shown to be directly correlated to the thermal redistribution of carriers between localized states. Based on these findings, the role of carrier localization in the recombination processes in AlGaN QW structures is underlined and its implications for efficiency droop are discussed.