THESIS ABSTRACT

Abstract

Nepal possesses immense hydropower potential (43,000 MW) but has harnessed less than 10% after 114 years. The government’s Urja Bikas Margachitra (Energy Development Roadmap, 2024) targets 28,500 MW by 2035, requiring massive capital investment. Mega projects like the Upper Arun Hydroelectric Project (UAHEP, 1063 MW) are central to this vision. However, financing such capitalintensive projects involves a critical tradeoff: affordability (often via lowcost foreign debt) versus domestic institutional capacity building (supported by domestic financing). Current financing strategies tend to prioritize shortterm costefficiency, potentially undermining longterm national capacity. This research aimed to: (1) assess the financial viability of UAHEP under three debtfinancing options (domestic, blended, international); (2) conduct a sensitivity analysis to evaluate the impact of foreign exchange (forex) risk on financial returns; (3) qualitatively assess the influence of financing sources on domestic participation and institutional capacity in comparable projects; and (4) synthesize quantitative and qualitative findings to identify an optimal financing strategy that balances financial returns with institutional development. A mixedmethods design was employed. Quantitative financial modelling used standard project finance metrics (FIRR, DSCR, payback period, LCoT) for UAHEP under a fixed 70/30 debtequity ratio. A oneway sensitivity analysis tested the effect of USDNPR exchange rate fluctuations on IRR and IDC. Qualitative assessment involved 16 hydropower projects (≥50 MW) evaluated through a Local Participation Index (LPI) and an Institutional Capacity Index (ICI), drawing on secondary data and key informant interviews. A MultiCriteria DecisionMaking (MCDM) framework integrated the affordability and sustainability dimensions. International financing yielded the highest financial returns (FIRR 7.9%, DSCR 2.87, payback 7.86 years) but was highly vulnerable to forex risk: a 5% USD appreciation reduced IRR by 25% and increased IDC by >150%. Domestic financing achieved the highest sustainability scores (LPI 0.43, ICI 0.85) but had the lowest financial returns (FIRR 6.35%, below WACC) and a narrow DSCR (1.58). Blended financing (30% domestic, 40% foreign debt) offered moderate financial performance (FIRR 7.26%, DSCR 2.18) with significantly reduced forex sensitivity (IDC +62% over 5% appreciation) and moderate sustainability outcomes (LPI 0.25, ICI 0.50). 2 The MCDM framework, under balanced policy priorities, identified blended financing as the most balanced strategy (gap 0.18, integrated score 0.47). The study empirically confirms the “Hydropower Paradox”: strategies that minimise financial cost (international financing) undermine longterm domestic capacity, while strategies that maximise domestic capacity (domestic financing) face financial constraints. Blended financing offers a pragmatic synthesis, enabling Nepal to pursue ambitious energy targets while fostering domestic institutional development. The MCDM framework provides a replicable tool for policymakers to navigate this tradeoff.

Keywords

Hydropower financing, foreign exchange risk, institutional capacity, technology transfer, MultiCriteria DecisionMaking, Nepal, Upper Arun Hydroelectric Project.