Sixteen gigalitres of water previously set aside for power generation will be released for other uses by Gippsland Water.
Minister for Water Gayle Tierney said the unused water had been reallocated for farmers, traditional owners and to improve river health.
The decision to reallocate 16 of the 25 gigalitre allocation known as the Latrobe bench bulk water entitlement was made through the Central and Gippsland Sustainable Water Strategy.
The remaining nine gigalitres was being retained by the government to respond to emerging needs.
Southern Rural Water will make the additional water available for farmers to boost the local economy.
Ms Tierney said the Gunaikurnai Land and Waters Corporation would have access to additional water for self-determined cultural issues and the extra environmental flows would improve the health of the Latrobe and Tanjil rivers downstream from Blue Rock Reservoir as well as the Gippsland Lakes.