In a statement, the federal agencies said they'll work together to find ways to produce "clean, affordable and reliable power, affordable and sustainable water supplies, and sustainable economic development."
The generating station is a coal-fired power plant on the Navajo Nation about 12 miles from Grand Canyon National Park.
The 40-year-old plant is partially owned by the Interior's Bureau of Reclamation. Power from the facility is distributed to customers in Arizona, California, and Nevada.
The Sierra Club claims the generating station "is Arizona's largest single source of climate-changing pollution." The environmental group wants the plant to transition from coal.
In a joint statement, Arizona's U.S. Senators, John McCain and Jeff Flake, said they were encouraged by the project but wanted more details from the Obama administration.
The senators said they were still unclear if the EPA will "impose costly and unnecessary visibility regulations" that could threaten the station.