The team will effectively take the supply vacated by McLaren, who are starting a new partnership with Japanese manufacturer Honda.
Lotus will continue to design and manufacture their own transmission.
"We intend to return to the front of the field with the goals of winning grands prix and being a strong championship contender once more and we see this new agreement as one step towards this aim," said Lotus chief executive Matthew Carter.
"The Mercedes-Benz Power Unit has shown good performance on track and it is our goal to marry this motive force to Enstone's (Lotus) chassis expertise."
Lotus, the former championship-winning Renault team, have scored just eight points in 15 races this season after finishing fourth overall last year. Their current drivers are Frenchman Romain Grosjean and Venezuelan Pastor Maldonado.
Mercedes have dominated with their new V6 turbo hybrid power unit, with their works team winning 12 times and on the verge of wrapping up the constructors' title.
Mercedes will also supply power units to Force India and former champions Williams.
"It was strategically important for Mercedes-Benz to continue to supply three customers throughout this generation of power unit, in addition to the primary focus on our Silver Arrows works team," said Mercedes motorsport head Toto Wolff.
"It was therefore clear that we would be looking for a new customer from 2015. Lotus F1 Team is an impressive organisation that has delivered competitive on-track performances in recent seasons."
(Reporting by Alan Baldwin, editing by Toby Davis)
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