Mr Perrottet said the decision would support the arts industry, which has been particularly hard hit by pandemic restrictions, and the construction of the new building in Parramatta would create 1100 jobs.
The Powerhouse Museum is currently open under COVID-19 restrictions, with the upper levels accessible to the general public and the heritage halls available for booked tours.
Newly reinstated Arts Minister Don Harwin, who was cleared of wrongdoing during lockdown this week, congratulated the “passionate” campaigners and museum staff.
“We are delighted about the fact that this museum is going to get a whole new lease of life, this museum here at Ultimo and the museum at Parramatta,” he said.
“This is a great city already for its museums but we really are going to become the museum capital of the Asia-Pacific.”
Mr Harwin said 98 per cent of the Powerhouse collections were in storage so there would be easily enough to fill two museums.
Campaigners have argued building a new museum in Parramatta should not mean the loss of a central Sydney institution, which is part of the city’s industrial heritage. They have also argued many of the exhibits, including large planes and trains, cannot be easily moved.
Former Powerhouse deputy director Jennifer Sanders said she thought the decision was “fantastic” and “win-win” for Parramatta and the central city.
“This isn’t a backflip by the Premier, it’s the Premier making a mature decision based on good expert advice and fantastic community voices and we congratulate her,” she said.
“You could not pick a more site-specific, technologically complex, precinct-embedded museum probably in the whole of the country. It was never a good idea to think that it could be moved.”
The government said it would explore keeping some of the funds earmarked for relocation costs to be used on renovations of the Ultimo site.
One of the ideas floated for the Ultimo site is the construction of a new lyric theatre to give Sydney another bigger venue to compete with Melbourne for large productions.
Mr Harwin said he supported the reopening of the Theatre Royal, an 1100-seat theatre, but agreed with those advocating for a 1500-seat theatre alongside venues such as the Capitol Theatre and Lyric Theatre at the Casino.
“The advice has always been we need a range of venue sizes … but I totally agree about with those who say that having a 1500 seater is critical for the commercial theatre industry in Sydney, which is a huge jobs generator,” he said.
Greens MP Jamie Parker, whose electorate includes Ultimo, said he was not surprised by the decision due to the community backlash.
“People think they can’t win against bad government decisions, but time and time again, you know, the community proves that you can,” he said.
The building and construction union, CFMEU NSW, said earlier this week it would put “bodies in front of machinery” to protect Willow Grove and St George’s Terrace, two heritage buildings earmarked to make way for the new museum in Parramatta.
Mr Perrottet said he could not say when the new museum would open or comment on the union’s threats since the planning process for the Parramatta proposal was not yet complete.
City of Parramatta Council Lord Mayor Bob Dwyer welcomed the government’s commitment to building the museum in Parramatta.
“The decision to retain the Powerhouse Museum at Ultimo should not compromise the investment we were promised for an iconic cultural institution in Western Sydney,” Cr Dwyer said.
The council opposes the demolition of the two heritage sites and will make a submission to the state government’s Environmental Impact Statement this month.
Caitlin Fitzsimmons is a senior writer for The Sun-Herald, focusing on social affairs.