State-owned power generator Hydro Tasmania has killed off a $2 billion wind farm planned for King Island because it says the project is not economically viable.

Hydro had planned to build a 600 megawatt wind farm on the island, with the power generated to be connected to the National Electricity Market via a high-voltage underwater cable across Bass Strait to Victoria.

The wind farm was expected to produce 2,400 gigawatt hours (GWh) of renewable energy for the national market, which is enough to supply around 240,000 homes.

Chief executive Steve Davy said changing economic conditions had seen the estimated capital costs for the wind farm alone increase by around $150 million.

"We have exhausted all avenues by which this concept could progress and now do not believe it appropriate to continue with the feasibility study," he said.

"We will now focus our resources on further investigating the benefits and viability of a second inter-connector as outlined in the Tasmanian Government's recent state budget."

Tasmania's Energy Minister Matthew Groom said Hydro had "done the right thing".

"Hydro Tasmania has today made a commercial decision that they won't be proceeding with the King Island Wind Farm proposal on the grounds that the proposal unfortunately has been found to be not economically viable," he said.

Donald Graham from the No TasWind Farm Group said "Blind Freddy could see two years ago that the project would not be feasible".

"Eighteen months ago they told us they needed to spend two years and many millions to do a feasibility study before they could determine if is was feasible," he said.

"They have done virtually nothing for 12 months and have discovered the obvious answer.

"And what did the island get out of it? Nothing other than a severely split community."

RET uncertainty not a factor

Hydro director Andrew Catchpole said it was disappointing that the project was abandoned.

"Of course it's disappointing when a project or an idea doesn't work out but this happens in business all the time you need to investigate the idea to a point to decide whether it's viable," he said.

Sorry, this video has expired Plug pulled on King Island wind farm ( Annah Fromberg )

Hydro Tasmania, Australia's largest renewable energy company, had voiced concern about future projects because of uncertainty surrounding the country's Renewable Energy Target (RET).

He said many renewable energy projects across the country would depend on the outcome of the RET negotiations at a federal level but insisted the board's decision was driven by economics.

"Our investigations eventually found that TasWind was not viable even if the RET was maintained at the existing level," Mr Davy said.

The company also cited factors such as the lower Australian dollar which was driving up the cost of building the turbines and a drop in demand from the National Electricity Market (NEM).

Federal MP for Braddon Brett Whiteley said the project "did not stack up".

"It would certainly have boosted jobs on the island and given the local economy a shot in the arm during the construction phase," he said.

"The Government is committed to supporting a sustainable renewable energy sector with an amended RET that will ensure long-term certainty for the renewables sector so it can continue to contribute to Australia’s diverse energy mix."

Residents divided on wind farm proposal

The project had divided residents of King Island, with many strongly opposed to its development.

Factors cited by Hydro Tasmania Low $A pushing up costs of turbines and other components

Low $A pushing up costs of turbines and other components Declining demand for power on national grid

Declining demand for power on national grid Projected increase in on-island construction costs

The 200-turbine wind farm was facing a legal challenge by the No Tas Wind Farm group who argued it did not have enough community backing.

Hydro said the project would not proceed to a feasibility study if the island's residents did not support it.

A survey taken in mid-2013 found almost 59 per cent of the community wanted the project to proceed.

The wind farm was expected to employ up to 60 workers on King Island if it went ahead.

Mr Davy thanked King Island residents for their input in the process and said Hydro Tasmania would continue to support the island.

"We recognise that the TasWind project has created significant community debate on the island over the past two years," he said.

"We also recognise that today's announcement will be received with mixed emotions."

Mr Whiteley said he hoped the island could move on quickly.

"Although the proposed King Island wind project was not universally supported by the local community, I know some will be disappointed by this announcement," he said.

"It is hugely disappointing that the process has caused so much division in what has always been a very close knit community."