This chapter analyses the evolution of the globally hydropower sector and examines the influence of governmental policies on resource allocation in China’s hydropower plants. Findings indicate that southwestern China has a higher potential for production improvement than the eastern and mid-southern regions, implying more significant input distortions for hydropower facilities in the hydro-rich area. Additionally, small hydropower facilities encounter greater output fluctuations compared to medium or large facilities. We employed the difference-in-differences methodology to investigate the impact of China’s energy-saving power dispatch strategy on resource misallocation. Results reveal that this regulation reduces input distortions in hydropower plants, exhibiting notable diverse effects on the mitigation of these distortions. Our comprehensive micro-level analysis provides insights into policy formulation in energy sector, with potential global ramifications.