The funding for the Charlton Zone Substation Microgrid feasibility and demonstration project is part of the first round of the government's Regional and Remote Communities Reliability Fund.

The project will compare the feasibility of islanding two regional Victorian towns, Tarnagulla and Donald, exposed to supply vulnerabilities using a microgrid.

The government is supporting 17 microgrid projects nationwide, worth more than $19 million.

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Minister for Energy and Emissions Reduction Angus Taylor said the grants are essential to unlocking investment in microgrids and strengthening energy affordability in the regions.

"Microgrid technology is becoming increasingly cost effective, creating the opportunity for a reliable, low cost, off-grid supply for our regional communities," Mr Taylor said.

A microgrid is a subset of the broader electricity network with all the necessary components to operate independently.

Microgrids are typically developed for energy security, cost savings and sustainability.

Their appeal lies in being able to be 'off the grid' and run largely on renewable energy.

Member for Mallee, Dr Anne Webster, said the project would assess the feasibility of transitioning from off-grid diesel generation or remote grid connection to microgrid technologies.

"We need to be looking at options that will help lower cost of living pressures on families and businesses as we recover from the COVID-19 pandemic," Dr Webster said.

"Microgrids deliver benefits for the grid as a whole by saving in network costs."

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