Offshore wind farms would only be built off the coast of Warrnambool and Port Fairy under a scaled-back zone that's only one fifth of what was initially proposed for the south-west.
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The original proposal of 5100-square-kilometres has been cut to 1030-square-kilometres and contained to an area west of Port Fairy to the east of Logan's Beach whale nursery in Warrnambool.
The decision, announced this week, would spare Portland and Cape Bridgewater from being "surrounded" by wind turbines both on land and out to sea - and scuttle three proposed offshore windfarms.
Located 15 to 20 kilometres off the coast, the zone - the third officially declared in Australia - no longer includes South Australia.
The major scaling back of the wind zone would also mean fewer jobs and produce less renewable energy from offshore projects in the region.
When the consultation for the zone was first announced, the government said it could create 14GW of power to 8.4 million homes and create 3000 construction jobs and 3000 ongoing jobs.
The new zone would allow for 2.9GW of offshore wind energy - enough to power two million homes or the equivalent to two-and-a-half Portland aluminium smelters which currently uses 10 per cent of the state's electricity.
It would create 1740 jobs during construction and 870 ongoing operation jobs such as engineers, labourers, technicians, operators, riggers, divers, and administrators.
The decision for a smaller zone comes after extensive community consultation with local leaders, industry and community groups.
Backlash to the offshore wind zone from the Portland community included concerns over the impact of the offshore wind turbines on the marine life.
The declared area works around the Bonney Upwelling, Deen Maar Island and shipping routes, taking into account the environmental, cultural heritage and economic significance of these areas.
Minister for Climate Change and Energy Chris Bowen said the declaration was a major step towards Australia's clean energy future.
"The Southern Ocean offshore wind zone has the potential to create thousands of new, high-value jobs and help secure cleaner, cheaper more reliable energy for regional Victoria," Mr Bowen said.
"Australia has abundant renewable energy, the cheapest form of energy, and the government is committed to helping Australians benefit from these natural resources, including offshore wind."
Victorian Minister for Energy and Resources Lily D'Ambrosio said wind farms off Victoria's coast would help power the state with affordable, clean energy.
"Victoria is leading the way in offshore wind, with the first wind zones in the country declared off the coast of Gippsland and the south-west coast," Ms D'Ambrosio said.
"This is another step closer to delivering our target of at least two gigawatts of offshore wind energy by 2032 and will also help us get to net zero by 2045."
Feasibility licence applications for offshore wind projects in the Southern Ocean zone will open from March 6 until July 2, 2024.
There were three offshore wind farm flagged for near Portland including in the bay, in Discovery Bay and near Port MacDonnell but they all now sit outside the officially declared wind zone.
During the feasibility licence stage, developers must undertake detailed environmental assessments and engage in further consultation, including how the project will coexist with shipping, tourism and fishing industries.
Construction can only begin after the feasibility stage is completed and developers have gained subsequent environmental and management plan approvals, as well as demonstrating how projects will benefit Australian industry and jobs.