Solid Energy and a US corporation are to investigate development of lignite in Southland.
The State-owned coal mining company and GTL Energy of Colorado will look at establishing a plant, which will extract moisture from lignite and compress it into briquettes for home heating.
The proposal would involve consumption of 100,000 tonnes of lignite, annually, near Mataura.
The companies expect to make a decision about the plan by early next year.
Government figures say more than 12 billion tonnes of lignite, a soft undeveloped coal with similarities to peat, lie underground in Southland and Otago.