The Provincial Growth Fund is putting $3.16 million towards building two wind turbines on Rakiura / Stewart Island
It is estimated Stewart Islanders pay on average three times more than mainlanders for power.
Electricity is produced on the island through diesel generators which Environment Minister David Parker said consumed about 360,000 litres of fuel a year - the cost of which was continuing to rise.
Mr Parker said building an initial two wind turbines as part of the island's power generation network was the most economic and environmentally acceptable option.
"It provides a renewable energy source. It is estimated to reduce diesel use on the island by half, which will enable the price of electricity to be stabilised."
The island's isolation means it faced challenges to its sustainable economic development. "The high cost of electricity hinders businesses that might otherwise - for example - process fish on the island."
Some on the island had wanted a hydro scheme but Mr Parker said there was not enough storage for that and it would be more expensive.
He added some had wanted a cable from the mainland, but that would be much more expensive option as well.
"Wind energy is a clean fuel source compared to other energy sources, it does not pollute the air or produce greenhouse gasses," he said.
Smaller scale wind turbines were likely to be more suitable. The money will be used for an economic analysis, getting resource consents, geotechnical work, securing land access and installing turbines.