In this study I explore the challenges and opportunities associated with the development of sustainable mini-grid hydropower systems by evaluating two systems with different management models in the Ura and Chendebji communities in Bhutan. This research is based on field surveys and key informant interviews, complimented by a review of the literature. The findings reveal that access to electricity has improved the quality of life but has not triggered any substantial increase in income. Although there is evidence of surplus electricity generation, daily peak loads overshoot the installed capacity of the micro hydropower plants. The main reasons for high peaks include increased use of electrical appliances (lights and rice cookers) as a result of population growth. Promotion of energy efficient appliances and load shifting could address some of the peak demand and supply issues. However, without a grid connection, peak loads are unlikely to be met. Additionally, the financial analysis in this study shows that revenues from the current tariff do not meet the combined costs of annual operation and maintenance, and levelized repair and replacement costs per annum of the systems. There is a need for an annual subsidy of US$ 2,281 for Chendebji and US$ 1,576 for Ura micro hydropower systems. My key policy recommendation is that the development of micro hydropower should be coupled with the development of income generating opportunities in order to enhance the economic self-reliance of rural communities. Furthermore, by integrating micro hydropower with the grid at higher feed-in tariffs, the sale of surplus power could improve load management and displace the need for government to provide a subsidy. Finally, an education and training program should be provided in order to continuously maintain the skills of the local plant operators and increase consumer awareness about energy conservation.