This is to improve regional power connections, the bank said.
East Africa has some of the fastest growing economies on the continent but electricity shortages deter investment, pushing up business costs and sustaining poverty and inequality.
AfDB said on Wednesday the funding will help construct 508 km of transmission lines and substations along its path to allow for the transfer of 2,000 megawatts (MW) of electricity in either direction between Kenya and Tanzania.
(READ MORE: Kenya, Tanzania & Zambia sign power MOU)
"The Kenya–Tanzania Interconnection Project plays an important role in promoting regional integration through power trade," AfDB said in a statement.
Earlier this month, the two countries said they were seeking a consultant to oversee the construction of the line.
(READ MORE: AfDB to aid Kenya with loan for increased electricity access)
Kenya is adding 5,000 MW on installed capacity by 2017 from about 1,664 MW now. Tanzania aims to double its generation capacity to 3,000 MW by 2016.
Kenya, Tanzania and Zambia said in December they will spend 1.4 billion US dollars to link their power grids by 2018 and create a regional power pool for trading electricity.
Ethiopia and Kenya are also constructing a power line aimed at improving electricity supply between the two countries.
Southern Africa already has a series of interconnections linking countries, including South Africa, Zambia, Zimbabwe and Mozambique, which allows them to trade power.