The 3 Megawatt Cia-Aig scheme, near Achnacarry, in Inverness-shire, will provide up to 20 jobs during construction.
Highland Council and the Scottish Environment Protection Agency supported the proposal from RWE Npower Renewables. Jim Mather, the energy minister, said: "The Cia-Aig scheme is a good example of Scotland's potential for smaller hydro schemes which generate green energy and cut emissions.
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Hide Ad"The developer will provide a community fund for long lasting benefits for the area.
"Viable hydro schemes that make the best use of our natural resources have a future in a low-carbon Scotland."