HRL Group has established a special purpose company Dual Gas to develop the project which is due to be operational in 2013.

The demonstration project will generate up to 550 megawatts of power using syngass - a synthetic gas produced from the drying and gasification of brown coal and natural gas.

It has also been designed to enable the potential retrofit of carbon capture technology.

Federal and State governments have supported the project with $150 million in funding.

The CO2 emissions intensity of the demonstration project is expected to average 0.78 tonnes of CO2 per megawatt hour, about 40 per cent lower than current Latrobe Valley coal-fired power generation annual average.

The carbon emissions intensity is also expected to be lower than any other coal-fired power station in Australia.

Dual Gas will lease a portion of the Energy Brix Australia Corporation site in Morwell for the independent development and operation of the demonstration project.

Construction is expected to start in 2010 and the total project will cost more than $750 million.

Victorian Energy and Resources Minister Peter Batchelor welcomed the announcement.

``Cleaner energy projects like the HRL plant are important to Victoria's smooth transition into a carbon constrained world by cutting greenhouse gas emissions,'' Mr Batchelor said.