Tibet and the Sichuan-Yunnan Tibetan area have enormous potential for hydropower development. Therefore, accelerating hydropower development in these areas can contribute to water resource utilisation and help relieve the poverty, which has also become a necessary choice of national strategic importance to comply with energy-saving, emission reduction, and ‘power transmission from west to east’ policies. Under existing policies, research has shown that the basic costs of electricity from the typical plants in Tibet and the Sichuan-Yunnan Tibetan area are high and uncompetitive, so that investment enthusiasm for hydropower companies will wane and water resource utilisation will be affected. In this study, we suggest policies to improve the competitiveness and sustainability of the hydropower development in the Tibet and Sichuan-Yunnan Tibetan areas; eventually, the water resources therein can be more effectively utilised. Research has indicated that drafted preferential policies can effectively decrease the cost price. Additionally, the hydropower industry in these areas should be incorporated into the national primary energy balance, forming a government-dominated market mechanism. This would consist of a mandatory market share of the hydropower transmitted from Tibet and the Sichuan-Yunnan Tibetan area and hydropower–carbon trade mechanism – the aim being to promote the consumption of hydropower across the nation.