Hydropower is essential in global and Sri Lankan renewable energy sectors, addressing substantial electricity demand with significant growth potential despite developmental challenges. However, it faces challenges from climate variability, which affects water availability and energy generation. In Sri Lanka, climate change-induced droughts have severely impacted hydropower, emphasizing the need for thorough capability evaluations. This study examines drought events in Sri Lanka using historical data (rainfall, streamflow, and temperature) and future scenario predictions from the CNRM-CM6–1 climate model under the severe SSP8.5 scenario. The HEC-HMS model was calibrated and validated to analyze catchment behavior and project future streamflows. Drought patterns were assessed using the Standardized Precipitation Index (SPI) and Streamflow Drought Index (SDI) over various time frames (3, 6, 9, and 12 months) until 2050. Comparative analysis revealed that extreme drought conditions in future scenarios are expected to increase the frequency of Extremely Dry events under the SDI3 condition, reducing power generation by approximately 64.44%. Under the SDI12 scenario, fewer extreme dry events but a higher impact from other drought categories are projected to reduce power generation by around 75.72% in the worst-case scenario. Long-term drought events are anticipated to impact power generation severely, with SDI12 demonstrating the most significant influence.