Sandy Bay's origin traces back to the development of a hydroelectric power station in the late 1920s, primarily to power the adjacent smelters and mines in Flin Flon, Manitoba. Initially situated downstream on the Churchill River, its relocation was encouraged near the future site of the Island Falls Generating Station, eventually altering traditional lifestyles and shaping the community's growth.

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The transformation continued as the Island Falls Generating Station reshaped the region, leading to Sandy Bay's establishment as a Local Community Authority in 1965. However, with the station's switch to an automated system in 1966, employment opportunities dwindled. Subsequent developments, like the introduction of an all-weather road in 1967 and the designation as a northern village in the 1980s, brought necessary services but also shifted the community's economic focus toward tourism.

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Today, SaskPower oversees the dam's operations, now entirely automated. While the community sustains a local store, residents often access additional supplies and groceries in Flin Flon, Manitoba, reachable via a two-hour drive along gravel and paved highways.