Most of population which they do not have electricity are living in remote rural areas or off grid, to provide electricity for remote areas is a challenging task which require a huge investment and infrastructure, it is therefore convenient to provide them with decentralized energy system like distributed generation or hybrid system etc. utilizing the available renewable energy. This paper presents study results about the dynamic analysis of self-excited induction generator for micro-hydro power plant in which generation is carried out by the use of self-excited induction generator (SEIG). It can be a very effective solution to the power shortage in the hilly regions of developing countries, like Nepal, Bhutan etc. It is more economical than other possible electric power sources, because it requires simple design and semi-skilled persons; local manufacturers can manufacture the components. SEIG is becoming more and more popular, mainly due to its low cost, simple construction, robustness of its rotor design and low maintenance requirements. When Induction motor is used as a generator, the major problem is its terminal voltage fluctuation at varying load and varying speeds. To predict the dynamic behavior of SEIG driven by a constant torque from micro-hydro turbine is carried out by using MATLAB/SIMULINK under different loading conditions. The model has been developed using “SimPowerSystem” library from MATLAB to perform the simulation.