Hydroelectricity represents a large-scale alternative to fossil fuel generation, contributing only very small amounts to greenhouse gas emissions and other atmospheric pollutants. However, developing the remaining hydroelectric potential offers many challenges. Public pressure and expectations regarding the environmental and social performance of hydropower tend to increase over time. Moreover, in the context of the restructuring of the electricity sector, markets may favor more polluting (and less costly) options. This article, based on an International Energy Agency initiative on hydropower, proposes a set of actions to meet these challenges and develop the remaining hydropower potential in a sustainable way. It is the role of Governments to put forward policies and regulations that do not unduly favor or penalize specific power generation options, while effectively protecting the environment and the rights of affected populations. In setting up such policies and regulations, the positive externalities of hydropower-versatility of energy services, very few regional or global impacts, flood control, etc-should be clearly recognized. The industry also has a central role to play. Environmental mitigation measures and compensation for persons and communities affected by hydropower projects are well understood today, and should be universally applied. Developers have the responsibility to fully integrate appropriate measures into project design. This also means eliminating unacceptable alternatives early in the planning process, allowing for full community participation, and sharing project benefits with local populations.