The Federal Government has announced it will spend $6 billion buying out New South Wales' and Victoria's shares in Snowy Hydro Limited.

The deal means the Commonwealth will wholly own the company and is a step closer to starting work on the Snowy Hydro 2.0 scheme.

It is buying New South Wales' 58 per cent stake in the project for $4.1 billion, while Victoria has agreed to relinquish its 29 per cent shareholding for $2 billion.

The purchase was flagged in last year's budget.

The Energy Minister Josh Frydenberg said it was a good deal.

"This is fair value for this important asset," he said.

"It unlocks $6 billion for the people of New South Wales and Victoria to invest in the infrastructure they need."

The deal stipulates the states have to spend the money on "productive infrastructure" which could include projects like transport, schools or hospitals.

Mr Frydenberg said the Federal Government would not have a say on which projects were funded.

"While we don't have a final say over their choice of projects, we would expect the states to invest the money consistent with that broad commitment," he said.

"They will have responsibility for using this money wisely."

Victorian Treasurer Tim Pallas welcomed the agreement.

But he says exactly where the $2 billion will be spent is yet to be determined.

"This is a historic deal that is good for Victorian households and it's good for our economy," he said.

"It means that the Andrews Government can continue to build the historically high levels of infrastructure investment that we’ve come to expect year-on-year."

NSW Premier Gladys Berejiklian has vowed to spend her state's windfall in regional areas.