Prime Minister John Key says it was "totally legitimate" for Meridian Energy to give the Department of Conservation money, if the payment was made to offset the environmental impacts of a wind farm.
But it would not be acceptable if payments were made to any government department to keep quiet about their concerns.
DOC is rejecting claims Meridian bought its silence over a controversial South Island wind farm.
It is standing by the confidential 2007 deal, which involved a payment of $175,000 by Meridian to the department in return for DOC not opposing the Project Hayes windfarm near Ranfurly in Central Otago.
Mr Key said DOC had been asked for a full report and it was expected to be received within a day or two.
"I'm not opposed to agencies accepting money in the way that DOC has if it is offsetting environmental impacts," he said at his post-cabinet press conference today.
"It is not acceptable for a government agency to accept hush money."
Mr Key said he understood it was not an isolated case.
"If in this case Meridian was making a payment to DOC to offset the environmental impacts of the Hayes windfarm. . .that's totally legitimate and acceptable."
The Environment Court has been hearing submissions over a bid by Meridian to gain resource consents for the $2 billion windfarm.
Director-General Al Morrison said a suggestion DOC accepted money in a secret deal to remain quiet over the windfarm proposal is totally inaccurate.
"It is no secret that we have negotiated directly with Meridian Energy to resolve local conservation issues – we publicly released the details of the agreement in July 2007," Mr Morrison said.
In 2006 the Government itself decided to make a submission in support of the Project Hayes proposal in the view of the national interest in renewable energy.
DOC had addressed concerns it had about the impact of the proposal on water quality, some bird and plant species and access to neighbouring conservation land.
It made submissions to local authorities and also entered into direct negotiations with Meridian to resolve them.
"In this case an agreement was reached which resulted in $175,000 being set aside to improve public access to nearby conservation land and for a series of plant and birdlife issues to be addressed," Mr Morrison said.
Meridian was also required to deal with DOC's concerns over impacts of the scheme on water quality and native fishes.
"Clauses were specifically entered into the agreements to ensure the details could be publicly released once signed and they have already been fully tabled, including the amount agreed, before the Environment Court," he said.
Conservation Minister Tim Groser and Green Party co-leader Jeanette Fitzsimons said they had only recently been made aware of the deal.
Mr Groser said the agreement had happened on the previous government's watch and the National Government would reserve its position until it had all the facts.
However, he said the issue had a broader context, which was that power providers were struggling to increase generation to keep pace with growing demand.
Ms Fitzsimons said the issue of bartering over developments was not new, and was an ongoing saga of development and conservation clashing.
While there were many options in terms of mitigating conservation damage, money changing hands in secrecy for silence was unacceptable.
"DOC is obviously going to do something with the money, and they're going to do something of environmental benefit," Ms Fitzsimons said.
"But that should not have been a secret deal and it should not have been at the price of buying DOC's silence."
Would you cast a tactical vote against your preferred party?Related story: Fringe parties look for deals