Rotorua mayor Steve Chadwick said the grant was great news.
"The grant announced is a great boost to progressing the proposed Tarawera project to protect our lakes water quality and public health and contribute to our district's sustainability.
"The Tarawera community is very committed to this project and will be thrilled."
Work to investigate a reticulated sewerage scheme for the Tarawera community gathered momentum late last year when the Tarawera Sewerage Committee was established at the community's request.
"This is a similar community-led approach that has progressed the East Rotoiti/Rotoma scheme," Mrs Chadwick said.
"That scheme also attracted external funding and I understand further external funding will be sought for Tarawera."
The committee headed by Glenn Snelgrove includes representatives from the Tarawera community, iwi, Te Arawa Lakes Trust, Lakes Water Quality Society, Rotorua Lakes Community Board, Fish & Game, Federated Farmers, Project Rerewhakaaitu, the Ministry of Health, Department of Conservation, Rotorua Lakes Council and Bay of Plenty Regional Council.
Rotorua MP Todd McClay said the announcement had been many years in the making.
"This is a real win for lake water quality.
"The need for sewerage reticulation has been raised with me by the Lake Tarawera Ratepayers Association and our council for some time, and I am delighted that we have secured the funding, which means this project can now move ahead.
"Lake Tarawera is a beautiful lake, but we know it is increasingly coming under pressure. A sewerage reticulation and treatment scheme means the removal of old septic tank systems, which is good news for lake water quality," Mr McClay said.
"This lake is a real treasure for local people and visitors and today's announcement will be welcome news for Tarawera homeowners and the tens of thousands of people who use the lake each year. I congratulate chair of the Ratepayers Association Libby Fletcher and her committee and members for their hard work."
A reticulated sewerage system, connecting to wastewater treatment is proposed to remove 15 per cent of manageable inputs into the lake.
Mrs Fletcher said the news was exciting for Tarawera and reticulated sewerage had been her "number one priority".
"We started off some years ago when it was brought to our attention that septic tanks around the lake were, in many cases, old, not functioning properly and seeping into the lake," she said.
"This is just a start, now we've gotta go out and get more funds."
Lakes Water Quality Society chairman Don Atkinson was also thrilled with the news.
"Getting external funding into this project is critical to its success. [The grant] is a giant step forward."
The grants are the first tranche of funding from the $100m Freshwater Improvement Fund announced last year.
The other Bay of Plenty projects to receive funding were the Katikati Hills to Ocean - H20 Improvement Project ($250,000 over five years) and the Rangitaiki River wetland restoration project ($1.5m over five years).
"Our Government has been systematically improving the management of freshwater with the water metering regulations in 2009, the National Policy Statement in 2011, the Freshwater National Objective Framework in 2014 and the 90 per cent of lakes and rivers swimmable by 2040 target announced earlier this year," Dr Smith said.
"We know these improvement projects work from our previous investments. Lake Rotoiti and Lake Brunner have markedly improved water quality since similar grants were made from earlier funds.
"We are river by river, lake by lake, improving freshwater quality so New Zealanders can better enjoy our great outdoors."
Bids for the fund opened on February 23 and closed in April. Funding deeds will be negotiated with the successful applicants following today's announcement.
The amounts allocated to each region are:
Northland: $2,519,223
Tasman: $7,000,000
Auckland: $1,042,500
Marlborough: $519,950
Gisborne: $847,450
Canterbury: $2,693,586
Bay of Plenty: $8,250,000
Otago: $375,000
Waikato: $1,641,638
Southland: $5,000,000
Taranaki: $2,000,000
Hawke's Bay: $3,496,156
Manawatu-Whanganui: $5,843,923
Wellington: $2,171,625
Multi-regional Projects
Arable Research: $485,168
Beef and Lamb: $265,000
