The project would involve work to lay a reticulation system throughout the central city, meaning more torn-up roads and road cones.
But the Dunedin City Council says it could be done at the same time as other projects, like the new hospital build and central city upgrade, meaning limited disruption for the public.
The eco-friendly energy system for central Dunedin came a step closer after the council, University of Otago, Southern District Health Board and Ministry of Health signed a Memorandum of Understanding (MOU).
Under the MOU, the organisations would jointly investigate development of a low-carbon district energy system to provide cost-effective heating for major energy users within a central city network.
The first step would be preparing a business plan.
Council energy plan
co-ordinator Jeremy Baker said there was a range of possibilities for how the energy centre could work.
The planned business case would look at all the options around the heating plant, fuel source and reticulation system.
While Mr Baker said he did not want to limit the possibilities of discussion about a fuel source, the potential for biomass fuel had already been raised.
That would involve using forestry residue and wood chips, a renewable, locally available and carbon-neutral resource.
Biomass fuel would deal with issues like peak load times if electricity was used, where everyone was heating at the same time of day.
"There's economics to consider, as well as reliability."
Modern systems were "very good in terms of pollution control".
"I think it's fair to say it's a clean fuel."
The signatories of the MOU would be the initial organisations interested in being hooked up to the reticulation system.
The existing energy system, the coal-fired Dunedin Energy Centre in Castle St, had served the hospital, university and now defunct Cadbury's factory.
Using that site was one option for the centre.
Mr Baker said development of the centre would be "a multi-year project".
Council chief executive Sue Bidrose said the idea had "real economic and environmental benefits".
While it was undecided who would pay for the plan, Dr Bidrose said it would be a cost to the organisations involved. The council would pay for the work required for the reticulation system.
University of Otago chief operating officer Stephen Willis said the opportunity to collaborate on this project was a demonstration of the city's energy leaders working together to support sustainability.