The upgrade for Aurora Energy will include housing new power transformers and switchgear in a purpose-built building at the corner of Somerville and Cranston Sts.
The new substation will be at the rear of the existing substation site.
There will be a transition to the new substation from the middle of next year.
Aurora has said ageing equipment would be replaced, which would strengthen the electricity supply for customers in Andersons Bay and the Otago Peninsula.
Aurora project manager Wiaan Booyens described it as a rebuild, although he said the new substation would be better.
Once it is completed, the Andersons Bay substation should ease the burden on the St Kilda substation and accommodate growth on the Otago Peninsula.
It also sets up the network to cope with higher loads expected to result from trends such as more electric vehicles being purchased.
Works include construction of a new pre-cast concrete switchroom building for housing new switchgear, installation of a switchboard and reconfiguring some pipes.
Construction work at the site had been scheduled to start in July, but some changes in design were needed.
Construction started last month, Mr Booyens said.
Martin Civil Construction will continue working at the site until the end of the year, other than a short break for Christmas.
Construction will then resume early next year.
Electrical equipment is to be installed after that.
The Andersons Bay substation is one of the original substations in Aurora Energy’s Dunedin network.
The company has started a five-year investment programme worth $563 million.
