It provides irrigation in Taoyuan, flood control for the Taipei Basin, and hydroelectricity and domestic water supply for more than three million people in northern Taiwan.

Completed in 1964 after nine years of construction, Shihmen was Taiwan's first multi-purpose water project and a major step towards the island's economic independence after World War II.

Year-round water releases from the dam enabled additional rice harvests and doubled Taoyuan's annual agricultural output, while the reservoir became a tourist destination due to its scenery and plentiful fisheries.

Efforts to reduce the rate of sediment accumulation, including dredging, check dam construction and watershed restoration work, have had a limited effect.

[7] Due to the limited storage capacity of the small Taoyuan ponds, there was often not enough water for irrigation in the November–April dry season, demonstrating the need for a large reservoir.

[7] A dam at the "stone gates" (Shihmen), a deep canyon formed where the Dahan river exits the mountains, was proposed as early as 1938, but plans were dropped at the beginning of World War II with the strain on industrial resources.

[8] In order to improve its economic self-sufficiency, the government initiated the construction of Shihmen Dam, Taiwan's first multi-purpose water project.

The initial budget for the dam was NT$1.4 billion, with approximately half of that as low-interest aid loans from the United States through the Agency for International Development.

[7] Starting in July 1955, access roads and worker facilities were constructed at the dam site, and the area of the future reservoir was prepared to accommodate flooding.

About 2,000 people (416 families) living in the Dahan River valley would be displaced by the project; they were relocated starting in 1956 to areas along Taiwan's northwest coast.

Although the government built new homes, schools and other infrastructure as well as providing land compensation to families, the resettlement programme was the subject of bitter controversy.

[10] About 120 hectares (300 acres) of nearby farmland were purchased by the government to provide 6,675,000 cubic metres (235,700,000 cu ft) of earth and rock needed to build the dam.

[13] As the reservoir filled, it also inundated several historic landmarks, including the former summer villa of Chiang Kai-shek, the Amuping Stone Bridge and a nearby Earth God shrine.

[8] The importance of the dam for irrigation has been decreasing since the 1990s as Taoyuan County saw significant urbanization; in the meantime, demand for cleaner domestic water has risen.

[17] However, due to the project's high capital cost, the actual annual return on investment was only 1.5 percent: "It stands as an engineering monument of which the Chinese people may be proud.

[19] Water from Shihmen Dam is distributed to 28 districts in Taoyuan City, Hsinchu County and New Taipei, with a combined population of some 3.4 million people and more than 36,500 hectares (90,000 acres) of irrigated land.

"[25] Additionally, large flooding events can cause turbidity levels in the reservoir to increase by over 3,000 times of average, forcing authorities to shut down water supplies.

[25] This has been further exacerbated by global climate change reducing the length of the rainy season in Taiwan, while increasing the intensity of rainfall when storms do strike the island.

This sediment mainly comes from landslides and other erosion-related issues in the steep, rugged drainage basin, which have been exacerbated by deforestation, land-clearing for agriculture, and the opening of roads into mountainous areas.

[25] The textbook The Hydraulics of Open Channel Flow by Hubert Chanson describes the dam as having "become a vast sediment trap with an inappropriate storage capacity to act as a flood control or water supply reservoir.

[25] The largest 24 sabo dams have collectively prevented some 36 million cubic metres (29,200 acre feet) of sediment from reaching Shihmen Reservoir.

Beginning in 1985, seven dredging companies removed more than 10 million cubic metres (8,000 acre feet), but the reservoir continued filling with sediment faster than it could be excavated.

In more recent years, the Taiwanese government has revived the idea of constructing more mega-dams in the Dahan River to increase water retention capacity and trap silt.

[37] The large amount of sediment flowing into the reservoir has also caused unusually high nutrient levels, which leads to frequent eutrophication and algae blooms in the summer.

[38] In 2008, the Taiwanese Environmental Protection Agency allocated NT$200 million for eutrophication control projects at Shihmen, Feitsui, Zengwun and Kinmen Reservoirs.