The European Commission will probe the UK Government funding promise to convert the Drax coal power plant to biomass.
The inquiry into the legality of a loan guarantee follows a complaint by environmental campaigners, Friends of the Earth (FoE) together with an energy cooperative Bristol Community Energy Limited, who claimed it broke EU rules on state aid, which require member states to notify the Commission and that there must be no market distortion.
In April last year, the British government offered a guarantee on a £75million loan Drax took out to convert three of its six generating units at the Drax Power Station at Selby, North Yorkshire, into burning biomass.
FoE challenged the claims that the new plant would reduce carbon emissions, by pointing out trees would need to be imported for the 7million oven-dried tonnes of wood a year for the pellets which would fuel the plant.
EU policy-makers have in the past worked on the assumption biomass is carbon-neutral because emissions generated when it is burnt for heat or power are offset instantly by the growth of more biomass.
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