While renewable energy-based off-grid technologies present a promising solution for providing energy access for remote communities in developing countries, the evidence suggests that their functionality is often problematic. Previous studies have identified some operational and design factors influencing the performance of such off-grid systems. However, these have only involved case studies of single projects and have not sought to use or develop theoretical models to explain what drives sustainability. Qualitative research methods are used in rural Nepal to develop an understanding of how operational, design and other factors influence the performance and sustainability of micro-hydro projects. The findings identify project attributes influencing micro-hydro project performance, and a theoretical model for the sustainable operation of community-managed energy systems is developed. The importance is shown of post-installation support, participatory design to encourage project ownership, and design of a system of sufficient size and reliability that will both support and encourage the uptake of generated power by households and small businesses. Similarly, the analysis revealed various dependence relationships between the sustainability dimensions. Local mini-grid projects with consistent stability of power supply and demand, can maintain a virtuous, self-reinforcing economic cycle within their communities, and thus, achieve more sustainable outcomes.