Carbon dioxide from the Bayswater coal-fired power station in the Hunter Valley will feed into an Algae.Tec facility to be set up next to the power station.

The algae will feed on carbon dioxide emissions, resulting in algal oil, which is converted into biodiesel and turned into grade A jet fuel.

The Bayswater plant uses about 7.5 million tonnes of coal per year and delivers power to the eastern seaboard.

Algae.Tec executive chairman Roger Stroud said the deal would provide fuel security on the east coast.

“At a time when all the petroleum refining capacity is closing down in NSW, this is the beginning of an era of renewable fuel which can be ‘grown’ in the state and can substitute imported petroleum products,” he said.

Macquarie Generation chief executive officer Russell Skelton said the technology had benefits for the coal industry as well.

“Carbon is now our single largest cost,” he said.

“This technology should reduce our carbon output, reduce our carbon bill and at the same time improve our bottom line.”