The money will help the local authority develop a pilot for two electric ferries and its create a business case for a replacement internal ferry fleet.
The council plans to introduce eight new boats, including three large ferries to serve the islands of Westray, Stronsay, Sanday and Eday.
Council leader Heather Woodbridge said: ‘We very much welcome this funding announcement which puts us on a sure footing as we progress our work at pace on the final business case.
‘This funding package is the first financial commitment in the collaborative approach that is being taken to replace Orkney's ageing internal ferry fleet, with discussions continuing on the delivery of the next tranche of business case funding and the shape of the financial model that will allow us to provide a modern ferry fleet that our island communities need and deserve.’
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