Construction work on the site will begin immediately and the Combined Heat and Power (CHP) facility, which replaces an existing coal-fired plant at the Fife site, is expected to be operational by 2012.

Some £8.1m support has also been secured from the Scottish government for the project, which will cut down existing carbon emissions at the site by around 250,000 tonnes each year.

Chris Parr, chief executive of Tullis Russell, said: "The plant will reduce our carbon footprint by 72%, thereby significantly enhancing our credentials as an environmental leader."

Once up and running, the CHP plant will produce 6% of Scotland's renewable generation targets. It will also help to secure jobs in the area, creating more than 50 permanent positions in the operation of the plant and 400 during the construction phase.

It will be owned and operated by RWE Npower Renewables,  a subsidiary of RWE Innogy, and Tullis Russell has negotiated a 20-year supply deal with the company, according to marketing manager Malcolm Sinclair.

In June, Tullis Russell boosted its pre-tax operating profit by 20% to £1.63m for the year ending March 2009, following "favourable movement" in exchange rates.

It also reported a "solid strengthening" of its positive cash position for the year, up to £5.3m from £3.2m in 2008.