Two solar-powered seawater desalination plants will be built on Ambae Island and Aniwa Island in Vanuatu to supply fresh water to 11,000 people.
The government has signed a four-million US dollar financing agreement with the Pacific Environment Community, funded by the Japanese government.
The acting director for Vanuatu's Department of Energy, Leo Moli, says an active volcano on Ambae Island means its main water supply, a lake, is often muddy.
And he says the 350 people of Aniwa Island have to travel four hours by boat to get water from another island.
Mr Moli says lack of fresh water will be made worse by climate change.
"Countries where we have small islands, desalination plants are an option. When the sea level rises, the seawater will slowly intrude into the ground water closing the underground water to be unusable. This project will be a very fruitful one for the government to give us an experience of how to manage it and how to use the technology, and how to replicate it in other parts of the country."
Mr Moli says the desalination plant on Ambae Island will produce 4,000 litres of fresh water per hour.
He says it will take 15 months to complete the project.