Energy Minister Chris Bowen announced the deal with Vanuatu at the pre-COP31 in Fiji on Monday, alongside a memorandum of understanding designed to boost the nation's renewable energy workforce and development.
But the deal comes as Australia faces renewed scrutiny over its fossil fuel exports and as the government considers the approval of a major coal-mine expansion.
Ministers and participants from more than 50 nations are expected to attend the four-day climate summit in the Pacific before the headline United Nations' Conference of the Parties meeting in Turkey in November.
Australia's first funding commitment at the event was designed to help Vanuatu expand renewable energy resources, Mr Bowen said, including grid modelling and more early career engineers.
"This is the sort of practical action that Australia takes to help the Pacific transition away from fossil fuels," he said.
"Some Pacific countries spend 25 per cent of their (gross domestic product) on diesel ... that's terrible for emissions, it's terrible for respiratory health, and it's terrible for the economy."
The funding could help Vanuatu electrify all of its government buildings by 2030, including schools and hospitals, Energy Efficiency Council chief executive Luke Menzel said.
"If Vanuatu can do it, Australia can do it, and so can the world," he said.
But the announcement came as other nations questioned Australia's climate record, pointing to its ongoing expansion of fossil fuel exports as their nations face rising sea levels.
The Hunter Valley Operations project, which would extend coal mining in NSW until 2045, is waiting for federal approval after the NSW Independent Planning Commission gave its go-ahead on Wednesday.
The Australia Institute and Australian Conservation Foundation placed a full-page advertisement in the Fiji Times as pre-COP31 began, apologising to Pacific islands for the coal mine expansion and calling it a "betrayal".
Australia had a track record of acknowledging climate change without addressing fossil fuels as a key cause, Greenpeace Australia Pacific's COP31 lead Simon Bradshaw said.
An exceptionally hot European summer and fears of the impact from a powerful El Nino weather cycle, which is characterised by warm ocean temperatures, could add to the sense of urgency at the climate meetings.
Countries such as Fiji and Tuvalu contribute a fraction of global greenhouse gas emissions but face some of the most severe consequences of climate change, including rising seas, extreme heat, droughts and saltwater intrusion.
Amnesty International secretary-general Agnes Callamard said world leaders must listen to Pacific communities at the pre-COP event and act.
"Concern without action will not hold back the tide," she said.
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