The facility will be located at Tullis Russell's Markinch plant
A £100m biomass heat and electricity power station is to be built at a paper-making factory in Fife.
The new facility - at Tullis Russell in Markinch - will replace the company's existing coal-fired system and will significantly reduce carbon emissions.
The announcement was made by the First Minister Alex Salmond during a visit to the site.
It will be built by Npower, with two thirds of the energy produced being fed back into the national grid.
The 45 megawatt facility will generate enough electricity to light a city the size of Dundee.
The current coal-fired system contributes 250,000 tonnes of carbon emissions each year.
It is estimated that replacing it will allow the Scottish Government to meet 6% of its renewable energy targets.
More than 500 jobs at the site will be secured. It is expected that a further 30 long-terms posts and about 300 construction jobs will be created.
The Scottish Government will contribute £8.1m to the construction costs for the facility, which is expected to be up and running by 2011.
A 20-year agreement to supply electricity to the Tullis site has been reached.
The first minister said: "This is tremendously exciting with huge economic and environmental benefits for Scotland.
"The Scottish Government has fully supported the partnership working of these two leading international companies.
"The new biomass plant in Markinch is a significant investment in Scotland."
The biomass process will burn locally produced waste wood.
That will range from unprocessed trees to furniture and other wood taken to landfill sites.