Coal is converted into gas while still underground
New "clean" technology is to be used to extract coal from massive untapped seams under Fife and the Firth of Forth for the first time.
Thornton New Energy has been granted the UK's first licence from the Coal Authority to use a process called underground coal gasification (UCG).
The firm plans to drill into coalfields and convert coal into combustible gas while it is still underground.
The gas can then be used for electricity generation.
It can also be used in industrial heating and even the manufacture of hydrogen or ultra clean diesel fuel.
Steve Walters, a director of Aberdeen-based Thornton New Energy, a subsidiary of BCG Energy, said producing electricity from gas generated underground from coal allowed it to be processed so CO2 could be removed, ensuring very low emissions.
Mr Walters added: "The award of the country's first UCG licence is a significant milestone in Scotland moving towards new, cleaner forms of electricity generation and it helps ensure that we won't have to be too reliant on importing energy from other countries in the future.
"Thornton New Energy's plans are for a rebirth of coal in Scotland - one which uses the vast expertise developed in the North Sea over the past 40 years and combines it with a traditional energy source, which has played a massive role in the Scottish economy for the past 200 years.
"With the current concerns about energy security, this is an ideal time for utilising the country's vast domestic coal reserves through modern technology that does not scar the landscape or produce vast amounts of waste product.
"When combined with carbon capture and storage, underground coal gasification can provide a long-term sustainable, cheap, secure and environmentally benign energy supply which could last Scotland and the rest of the UK for up to 200 years."
Councillor Tony Martin, chairman of Fife Council's environment, enterprise and transport committee, said he was "excited" by the announcement.
He added: "We are working with the company to assist the development of its innovative project which, hopefully, will lead to a long-term source of energy generation from a traditional fuel source.
"It is hoped the project will create sustainable job opportunities and consequent local economic benefit."