How does friction affect potential energy?

Friction doesn’t affect the potential energy itself because that is the energy associated with the position of the object and friction is related to speed, not position.

However we could say that friction reduces the amount of potential energy the object has at any particular time because kinetic energy is wasted as heat instead of being converted into potential energy.

In plain words friction stops an object going fast enough to go to the maximum height it would otherwise have achieved.