A £1.6m large-scale sea water-source heat pump scheme is to be built on Shetland.
The new facility in Lerwick will allow 225 more homes to join the existing network on the island.
It will be able to extract heat from the water, even on the coldest days, providing a ready supply of low-carbon heat.
The Scottish Government confirmed on Wednesday that it had approved a total of £1.75m funding for innovative heating projects in Scotland.
It is being split between three water-source heat pumps with schemes in Clydebank and Glasgow receiving £75,000 each and the Shetland project being awarded £1.6m.
The Queens Quay Development, which is on the site of the former John Brown Shipyard, will use the money to develop an investment prospectus for a district heating network using a water source heat pump in the River Clyde basin.
Glasgow University's Western Campus has been awarded £75,000 to develop a proposal for a water-source heat pump in the River Kelvin, which it is hoped will service new buildings planned for the site of the former Western Infirmary hospital.
Energy minister Fergus Ewing made the funding announcements at the Scottish Renewables annual conference in Edinburgh on Wednesday.
He said: "Supporting the development of district heating and wider low carbon technologies will help maximise the economic opportunities from Scotland’s low carbon sector.
"Heat is estimated to account for over half of Scotland’s total energy use and is responsible for nearly half of Scotland’s greenhouse gas emissions, so the imperative to take action is very clear.
"Continued growth in the number of homes and businesses benefiting from connecting to low carbon, affordable warmth provided by district heating networks helps the Scottish Government towards realising our ambition to increase the number of connections to district heating networks by 2020."
The Shetland project is supported by the District Heating Loan Fund, which has awarded funding to district heating projects across Scotland to help cut energy bills and reduce greenhouse gas emissions.
Since the fund was launched in 2011, a total of £10.25m has been awarded to 41 schemes.
Responding to the funding announcement, Fabrice Leveque, climate and energy policy officer at WWF Scotland, said: "We welcome this funding which will grow district heating across the country helping cut energy bills, reduce damaging carbon emissions whilst using innovative Scottish technology.
"However, with over half of our energy use coming from heating our homes we need a more rapid uptake of renewable heat options."