Although Ethiopia possesses a huge hydropower potential, the energy problem in the countryrnis enormous. A great majority of the population in Ethiopia are dependent on traditionalrnresources to fulfill their energy needs. Due to the poor energy supply, the people not onlyrnhave to put up with an unattractive living environment but also suffer the consequences ofrnclimatic change caused by the associated environmental impacts. Numerous villages do notrnget electricity supply due to the scattered nature of the settlements. Therefore, the energyrnpolicy should give enough attention to decentralized systems in which small hydropowerrnpotential plays a significant role. This study considers some of the small hydropower sites inrnthe Abbay basin and that the selection of optimum sites or the optimum level of developmentrnat the sites can be undertaken with the application of non-linear optimization techniques. Thernoptimization has been conducted on the basis of four theoretical small hydropower systemsrnestablished in the Abbay basin. Among these four, the two systems consisted of twornhydropower alternatives each and the other two consisted of three hydropower alternativesrneach. In this thesis, Microsoft Excel 2000 solver, which uses the Generalized ReducedrnGradient(GRG2) algorithm for optimizing nonlinear problems has been used. Using thisrnoptimization technique, the level of development of each of the hydropower sites has beenrndetermined. The method can also be used to select the optimum small hydropower site(s)rnfrom a number of alternatives. Further study for optimization can be conducted on renewablernhybrid systems combining a decentralized energy sources for rural electrification