A 60 bed container unit will be built at Rimutaka Prison but a prisoner advocate has concerns that the containers could create "tin shanties and slum prisons".
Howard League for Penal Reform president Peter Williams, QC, said the containers are for shifting goods, not housing people.
He said the important aspect was to keep them air-conditioned and heated in winter.
"Without air-conditioning or heating in the winter, they are almost unlivable," Mr Williams said.
He said there are problems with air-conditioning at Paremoremo Prison and heating at the 19th century Mt Eden prison.
"The general trend in prisons is for these sorts of things to desist from working through lack of maintenance and money available," Mr Williams said.
The idea of putting prisoners in modified shipping containers was looked into by the Corrections Department with New Zealand's prison population burgeoning.
The block, to be constructed on a field in the prison grounds in the Hutt Valley, would house high to medium security prisoners and be staffed by 20-25 new guards.
The Government previously announced it would use converted containers as cells to boost capacity.
Corrections Minister Judith Collins said today the unit would help the department evaluate whether the containers can be used in other prisons.
"This project is the first of its kind at a New Zealand prison and we hope it will point the way to how we can build extra prison capacity faster and much cheaper than in the past," she said.
"Corrections is forecast to run out of baseline beds early next year. We have to take immediate action to ensure that prisoners are securely locked away and the public is kept safe."
Ms Collins said prison numbers had swelled from about 5000 in 1996-97 to 8400 now.
As on Monday the muster was 12 short of breaking the record for the number of people locked up.
It was estimated a further 5000 beds would be needed by 2018.
Using containers was a quick and cost effective solution, and the recession meant there were plenty to be recycled, she said.
A tender process had started and cells would be in use from March.
Each bed would cost between $53,000 and $63,000, which Ms Collins said was far cheaper than for a new prison.
Staff, dining, showers and other facilities would also feature in the containers.
While some of the components of the initial cells will come from overseas, they will be extensively fitted out in New Zealand.
"It is my hope that in future most of the construction of container cells will be undertaken in New Zealand."
Prisoners would not be involved in construction because of the tight schedule, but they may be in future.
Corrections Department chief executive Barry Matthews said container cells were used in Australia, Britain and the United States.
They were similar quality to normal prison cells and better than in older prisons.
Asked about rolling out the new style of cells at Rimutaka given problems it has recently faced - such as guards alleged involved in a drug ring and a female guard having a relationship with a prisoner - Mr Matthews said overall there had been improvement in management of prisons.
Containers would be a mix of single and double cells.
The department was also rolling out double bunking at prisons, aiming to add 1000 beds to the system.
Prison guards' union, the Corrections Association of New Zealand, is taking the department to the Employment Court over the double bunking issue, saying it breaches collective agreements.
Mr Matthews said the extra beds were being put into cells but the department would have to await the court decision before inmates were moved.
Mr Matthews said there was already double bunking at some prisons in New Zealand - 21 per cent of cells had two inmates.
He said he had no concerns that the measures would impact on prisoners' human rights.