Deputy Premier and Arts Minister Troy Grant announced that two potential sites were being considered for the museum.

It is to be moved from its long-standing inner-city base in Ultimo.

A business case will assess the Parramatta Golf Club course and a riverside site, known as the old David Jones car park, to determine the viability and cost of each location.

Mr Grant said both sites presented "significant but different opportunities for a reinvented Powerhouse Museum which will become the anchor of a broader arts precinct for western Sydney".

"We're keen to involve the community members who will be using this facility to canvass their views on what they want out of their cultural institution, including factors such as location," he said.

However, the Sydney Business Chamber and the Parramatta City Council have called on the state government to consider putting the museum on the Arthur Phillip school site instead.

The chamber's western Sydney director, David Borger​, said the Powerhouse's new location was critical and developing all of the Arthur Phillip site for a school would be a "missed opportunity".

"It will lock up one of the largest city centre sites available for commercial use in Parramatta," Mr Borger said.

"For the Powerhouse Museum relocation to thrive, it needs to be located close to public transport and in a location easily accessible to pedestrians to maximise visitation."

Parramatta lord mayor Scott Lloyd said he was "super pleased" the Powerhouse was being moved to western Sydney and agreed the Arthur Phillip site was the best location.

"It's right in the heart of the CBD, 50 metres from the train station, you've got light rail going straight past," Cr Lloyd said.

He said the government could "just do a little bit of a switcheroo" and build the new high-rise school on the golf course site, where students could take advantage of the green space.

"A CBD is not really the ideal place to be having the high school, but right on the edge of the CBD is perfect," he said.

Independent Sydney MP Alex Greenwich and Sydney lord mayor Clover Moore are strongly opposed to the Powerhouse move from Ultimo.

The museum's preferred western Sydney site is expected to be announced by the state government next year.