Arts Minister Don Harwin says the Ultimo museum will undergo renovations, with a design contest to be held to find an architectural team to lead the project.

"Like the Victoria and Albert Museum in London and the Smithsonian in the US, the Powerhouse Collection has encyclopedic breadth," he said in a statement on Tuesday.

"Our investment in transforming Powerhouse Ultimo alongside establishing the Powerhouse Parramatta cements Sydney as Australia's leading cultural destination."

About $500 million has been set aside for the project, which will include expanded exhibition spaces, more artist studios and the creation of a new public square.

Iconic Powerhouse Museum pieces including the Boulton and Watt Engine, Locomotive No.1 and the Catalina Flying Boat will remain at the Ultimo site.

The Powerhouse is home to some of the finest Australian-made jewels, pieces by Australian designers including Carla Zampatti as well as work by international fashion empires Chanel, Alexander McQueen and Christian Dior.

The project is part of a broader government plan for the Powerhouse, which includes creating a new museum site at Parramatta and expanding the Museums Discovery Centre in Castle Hill.

The Powerhouse was slated to be closed and moved to Parramatta under a plan announced in 2015 by former premier Mike Baird.

That decision was overturned last July after public outcry, with Premier Gladys Berejiklian announcing the Ultimo site would remain and the construction of the Parramatta side would still go ahead.

The new site in Parramatta is due to open in 2023 with a focus on science and technology.

Australian Associated Press