Solid Energy is taking the first steps to unlock billions of tonnes of lignite from under the fields of Southland.
Work for the State coal mining company was officially started on Friday and a factory at Mataura is expected to be completed by June.
It will turn 150,000 tonnes of lignite into 90,000 tonnes of briquettes for home and industrial heating each year.
Eleven billion tonnes lie underground in Otago and Southland.
Solid Energy chief executive Don Elder says a far bigger plant could be built if the scheme proves economic.
Lignite is moist, low energy coal, which can be burnt for heat or used to make diesel or fertilser.