The Australian Renewable Energy Agency has escaped closure with the government agreeing to restore $800 million of funding.
The agency, which provides financial grants for 40 per cent of the CSIRO's energy research, was set to be stripped of $1.3 billion as part of the government's Omnibus Savings Bill.
The Coalition also planned to merge its funding role with the Clean Energy Finance Corporation, which expects to see a financial return on money it invests in research.
But a compromise was reached on Monday night to limit the cuts to $500 million after criticism from the opposition, academics and workplace unions.
The Canberra-based agency, which employs close to 50 departmental staff, will be funded for five years with $550 million cast over forward estimates.
ARENA was established in 2012 by the Gillard government and was to be abolished by the Abbott government in 2014. It received a stay of execution in March 2016 despite plans to cut funding.
The compromise came after the Australian Conservation Foundation warned a $1.3 billion funding cut could result in up to 5000 job losses in regional towns.
Professor Andrew Blakers, a professor of engineering at the Australian National University, also described the proposed cuts as an "existential threat" to clean energy innovation in Australia.
On Tuesday, Finance Minister Mathias Cormann said the government had decided to reclassify the $1.3 billion into concessional loans and equity.
"What we have agreed as part of this overall deal is to restore $800 million of that into grants funding," he told Sky News.
"That has no effect on overall government debt because we will be, of course, reducing the amount of capital available for concessional loans and equity to the commensurate degree."
Greens climate and energy spokesman Adam Bandt said Labor had been "played for fools" and he would work to restore the full funding.
"Labor and Liberal must immediately clarify what the finance minister meant when he said he'd reduce funding from other areas so that there was no net effect on the government's financial position," she said.
Community and Public Sector Union assistant secretary Michael Tull said the compromise was a welcome development.
But Community Power Agency director Nicky Ison said the decision was "a retrograde step".
"We're at a critical moment where Australia's electricity system is undergoing its biggest overhaul in decades and transitioning to renewable energy," she said.
The Clean Energy Council also criticised Labor for supporting the cuts and said the decision would "rattle the confidence of investors".
"A cut to ARENA's funding is a move at odds with the federal government's innovation agenda and is a disappointing change in the ALP's position," the council's chief executive Kane Thornton said.
"While we recognise the budget constraints facing the nation, clean energy innovation is a crucial lever to transition the Australian economy and create investment and employment opportunities for the future."
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