Rare-Earth oxyhydrides (REH3-2xOx) are characterized by photodarkening when illuminated by photons having an energy exceeding that of the band gap. We propose that the film is segregated in hydrogen rich and hydrogen poor areas. Upon illumination, the excited electrons reduce the three-valent cations inducing an insulator to metal transition in the hydrogen rich entities. These small metallic oxyhydride clusters are responsible for the enhanced optical absorption. In the surrounding semiconductor matrix the photoexcitation induces a transition from p to n-type conductivity. This persistent photoconductivity is due to trapping of the holes by hydride ions. As a result, the Fermi level rises above the conduction band inducing a Burstein-Moss effect and a large increase in the conductivity.