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The 1,020mw gas-fired combined heat and power station will be built at Seal Sands after energy minister Malcolm Wicks gave the go-ahead.
Combined heat and power plants are designed to produce both electricity and usable heat.
They have environmental benefits due to their very high levels of efficiency. Local industry will be able to harness and use the heat produced from electricity generation at this power station.
The project will create up to 1,000 jobs during construction and a further 60 for operations.
Mr Wicks said: "To secure our energy supplies, and power our homes, it is important industry brings forward new energy infrastructure to maintain a diverse energy mix.
"It's also important that as we face the challenges of climate change we move towards more efficient energy production and this power station is an example of that."
The plant will be built by Thor Cogeneration and could be fully operational by 2012.
Director Martin Green added: "We will now be finalizing the financial and contractual arrangements for the project and we would expect land preparation to commence very soon with the full construction commencing in 2009 and power being supplied into the grid in the early part of 2012."
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