Federal Climate Change and Energy Minister Chris Bowen declared the finalised zone on Wednesday after extensive consultation with local leaders, industry and community groups.
The Southern Ocean zone, located 15km to 20km off Victoria's coast near industrial Portland, will span 1030 sq km rather than the initially slated swathe of more than 5000 sq km.
No longer bringing the capacity to generate up to 14.6 gigawatts - the equivalent of three coal-fired plants - the Portland zone will generate up to 2.9GW of offshore wind, which is enough to power two million homes.
Announcing the decision with Victorian Energy Minister Lily D'Ambrosio, Mr Bowen said the zone had the potential to create "thousands of new, high-value jobs and help secure cleaner, cheaper more reliable energy" for regional Victoria.
The Australian Manufacturing Workers Union reiterated its call for rules for local content, including local Portland steel for wind towers, instead of equipment from China.
Without strong provisions to ensure that Australian-produced steel and local manufactured goods are included in the projects, local workers and regional communities will miss out on jobs and investment, union boss Steve Murphy said.
The decision to significantly reduce the size of the wind zone answered concerns of environmental groups about the impact on marine life, including migrating Endangered Blue and Southern Right whales.
The wind zone will work around shipping routes, the ecologically significant Bonney Upwelling that brings cold nutrient-rich water to the sea surface and Deen Maar Island's migratory parrots.
Victoria is aiming for "first wind" by 2030 to decarbonise a coal-dependent electricity grid, with all of Australia's coal plants due to close over the next 12 years.
"Victoria is leading the way in offshore wind, with the first wind zones in the country declared off the coast of Gippsland and the southwest coast," Ms D'Ambrosio said.
"This is another step closer to delivering our target of at least two gigawatts of offshore wind energy by 2032 and will also help us get to net zero by 2045."
Australia's most advanced projects lie in a swathe of the Bass Strait off the Gippsland coast, which was the first offshore wind area declared in 2022, followed by the Hunter zone off the NSW coast in 2023.
The latest zone would bring 1740 jobs to Portland and surrounds during construction, as well as 870 ongoing operational jobs, the ministers said.
Construction can only begin after the feasibility stage is completed and developers have gained environmental and other approvals, as well as demonstrating how projects will bring jobs and support local industry.
An offshore wind farm typically takes a decade to develop with a decision on Gippsland licences expected within weeks, according to proponents who have already completed exploration work.
Feasibility licence applications for developments in the Portland zone are due by July.
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