The energy supplier will undertake a two-year feasibility study of the Argyll-based power station before it decides whether to go ahead with the project.
The 440MW power station at Cruachan is one of only four pump storage hydro plants in the UK. If successful, the expansion project could see it generate 1,040MW.
The Scottish Government has said the country "could be on the verge of a new generation of hydro power to rival the revolution in the glens which saw electricity taken to the Highlands in the 1950s."
Welcoming the announcement, First Minister Alex Salmond, said: "The Scottish Government recognises the potential for future development at Cruachan and other similar proposals for hydroelectric storage, to contribute to a balanced mix of energy generation across Scotland. This could see hydro power generate up to one third of Scotland's entire generating capacity in the next decade.
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"Together with other developments, this major extension of pump storage technology will allow us to build on Scotland's powerful position as a world leader in harnessing natural resources. The plans for future pump storage development demonstrate that our significant and diverse range of natural assets continue to attract the huge investment in infrastructure that will enable the Scottish economy to flourish.
"This is why such proposals have been included in the draft National Planning Framework - as potential national developments."
Mr Salmond continued: "National development status establishes the need for a project. It does not grant development consent. Planning permission and any other necessary assessments and consents will still be required at the consenting stage.
"Any application for development at Cruachan will be considered on its own merits and a decision made only after all environmental impacts have been assessed."
(JP/IT)
