The Glenmuckloch project, situated at a site currently operated as a surface coal mine, is being developed by a joint venture between Buccleuch Estates and 2020 Renewables.
The scheme is expected to create 327 jobs during construction and about 15 permanent jobs.
It will help support the local economy in Dumfries and Galloway and the growth of renewables in Scotland’s energy mix.
Pumped storage hydro electricity stations are capable of storing vast amount of energy, offering flexibility in electricity supply when there is a greater proportion of power from renewable energy technologies.
Cabinet Secretary for Economy, Jobs and Fair Work Keith Brown said: “Renewable energy sources generated more than 56% of gross electricity consumption in Scotland in 2015, helping support our world-leading ambitions to become a low-carbon economy.
“The Scottish Government believes there is a huge opportunity around pumped storage hydro. This tried and tested technology can support peak demand and effectively store greater levels of electricity at times when renewable energy output is high but demand is low.
Buccleuch CEO John Glen said: "For five years we have been working closely with the local community and Hargreaves Surface Mining to restore and transform the site.
"Our vision is to create an energy park that will support local jobs and deliver major new investment in Dumfries and Galloway, and that has taken a step forward today.
“Renewable energy offers great opportunities for the area and the combination of pumped storage and on-site wind generation are a very natural fit."
