Welsh over-60s will be able to claim £500 off a new boiler under a scrappage scheme similar to the one already announced in England.
Up to 5,000 homes with the least efficient G-rated boilers will be entitled to a discount if they upgrade.
Eligible applicants will receive a voucher towards the cost of a new system.
The Conservatives welcomed the announcement, but criticised the delay in introducing a scheme which has been running in England since early January.
The Welsh scheme is aimed at the over-60s as they are more likely to be struggling with heating bills.
The Assembly Government said it wanted the £2.5 million scrappage scheme to tackle fuel
poverty, defined as when more than a tenth of household income is spent on energy bills.
Environment Minister Jane Davidson said: “We have allocated £2.5 million to the boiler scrappage scheme for 2010/11 and expect up to 5,000 Welsh households to benefit from a significant improvement in the energy performance of their heating systems as a result.
“This additional funding underlines the Assembly Government’s ongoing commitment
to tackling fuel poverty and reducing greenhouse gas emissions in Wales.”
Scottish finance minister John Swinney has also announced that £2 million will be made available for a scrappage scheme in Scotland.
Further details are yet to be announced, but the scale of the scheme has been criticised by the Scottish & Northern Ireland Plumbing Employers’ Federation.
SNIPF director Robert Burgon said: “The money allocated for the scheme represents less than 5 per cent of the total amount set aside for the scheme in England.
“If the same grant of £400 is given in Scotland, then only 5,000 householders will benefit, compared with 125,000 in England.”
But he added that the initiative was welcomed by householders and the heating industry: “There is clearly demand for such a scheme in Scotland – our e-petition on the Scottish Parliament website has attracted almost 300 signatures in just a few days and we are sure
that [supporters] will be pleased to learn of the introduction of the scheme.”