A heritage-listed building facing demolition as part of the Kingston Arts Precinct redevelopment will be left in place while developer Geocon and the Suburban Land Agency explore options to incorporate it into plans for the area.
But the agency could not rule out eventually demolishing the building.
A community panel will also be established by the end of the month as a forum of community representatives for the duration of the project.
The National Trust and local residents' groups have campaigned to retain the 1948 switch room, which has been converted into accommodation for resident artists at the Canberra Glassworks.
Urban Renewal Minister Rachel Stephen-Smith in a statement said retaining the chapel, as the building is known, would form part of the tender concepts design review.
"Both Geocon and [the Suburban Land Agency] have agreed to look more closely at the 1948 switch room ... that was approved for demolition in October 2014," she said.
"Consequently the approved development application for the demolition of the Chapel will expire in early October and will not be relied on when Geocon's development proposal is assessed on its own merits."
Kingston and Barton Residents Group president Rebecca Scouller said there would be a lot of people in the area happy with the decision and keen to work with Geocon and the Suburban Land Agency on the precinct's future.
"As we know, projects that involve community consultation early in the process tend to have better outcomes," she said.
But she was concerned the group had only been invited to nominate one person to the consultation panel.
Heritage architect Eric Martin has previously said preliminary plans for the project did not honour the Kingston Powerhouse's heritage citation.
"Our aim would be to preserve and integrate the switch room into the final design in an appropriate way," he told The Canberra Times in July.
Approval to demolish the switch room was granted before the Kingston Arts Project was put out for tender.
Geocon was announced as the successful tenderer in 2017 but took two years to sign an agreement with the ACT government to deliver the project.
The ACT government has committed $78 million to the precinct, including $50 million for dedicated arts facilities.