The council has agreed terms with a Danish company to supply and install essential upgrades to the Lerwick Energy Recovery Plant.
It is hoped the move by Babcock & Wilcox Volund A/S will lead to improved efficiency and capacity and cut carbon emissions.
The £2.8 million deal focusses on water cooling systems. The work should run for a year.
A new water-fed heat exchanger will be installed within the furnace, to replace the existing concrete and brick refractory walls.
This will increase efficiency, thermal output and reliability, meaning shutdowns should be less frequent.
Director of infrastructure John Smith said: “This project will give a new lease of life to our ERP, future-proofing an ageing piece of infrastructure.
“It was ‘cutting edge’ when it was installed in 1999, and this project will bring it back to the forefront of energy from waste technology.”