Energy and development are closely intertwined. Yet, increasing fossil fuel-based energy consumption contributes significantly to environmental problems both locally and globally. This article explores the interlinkages between local livelihood and environmental benefits from the provision of energy to remote rural households through small hydropower development. The analysis is based on research carried out around a large development project designed to assist the Government of India in the optimum utilization of small hydropower resources in the Himalayan and sub-Himalayan regions. There are about 100,000 villages in India that are not connected to electricity supply, many of them in the hilly regions with ample hydropower potential. The project aimed to demonstrate the utility of and options for providing electricity to such villages through clean mini-hydro. The article addresses the nature of the impacts of the demonstration small hydel schemes on the local communities, to what extent they translate into environmental benefits both locally and globally, and the perceptions and participation of the local communities in these small hydro schemes. The study explores the impacts of the schemes on financial capital, natural capital, social capital, physical capital, human capital, and gender equity in the local communities. It further provides a discussion on the links between local and global environmental benefits. Overall, it is found that the schemes' impacts both on the local communities and the environment are mostly marginally positive or neutral, although achieving clearly demonstrable benefits would require major upscaling of the effort involving broader changes than possible under this project. Furthermore, it is argued that some of the assumptions behind the project design were faulty. Involvement of the local communities and direct livelihood benefits to them are essential for the long-term sustainability of the small hydro schemes. The discussion and conclusions are intended to provide guidance to programmes and projects that aim to promote environmentally sound energy in the rural areas of developing countries. (c) 2005 Elsevier Ltd. All rights reserved.