The city council won the grant after conducting a feasibility study which mapped the heat consumption of 195 buildings in and around the city centre.
The study showed that there was a ‘commercial case’ for district heating, the council said.
As a next step, the grant from the government’s Heat Network Development Unit will fund a project development phase.
This will see a detailed business case developed, including the mapping of power, gas and sewage pipes, preliminary energy centre design, exploration of any power network upgrades required, a review of the opportunity to link the city centre project to other heat networks, and project quotations.
This next phase is expected to be completed in 2017.
Councillor John Tanner, Executive Board Member for a Clean and Green Oxford, said: ‘It’s excellent that the City Council has got some money back from the government to spend on reducing Oxford’s carbon footprint.
‘Sharing heat between buildings using highly insulated underground pipes makes a lot of sense,’ he added.