E.ON's Climate and Renewables arm can now build a plant in the western England port city of Bristol to power up to 160,000 homes, the Department of Energy and Climate Change said in a statement.

But E.ON announced it would first re-examine its strategy on renewable energy.

Developers say that government plans to reduce subsidies for dedicated biomass plants - which burn wood pellets and farm waste to produce power - by 7 percent from April 2016 have made investment decisions harder.

"We will now take some time to review the prospects for the project in light of the UK government's current banding review and how it fits with our portfolio of renewable energy investments in the UK," an E.ON spokeswoman said.

Proposals to cut biomass plant subsidies have jeopardized and already derailed some projects. But co-firing plants, burning biomass fuel and coal together, are planned to receive slightly higher incentives from 2013 under the banding review, due to be finalised this spring.

Last month, UK coal-fired power plant operator Drax scrapped plans to build a 290-MW biomass plant on its site in North Yorkshire, saying state support levels for the renewable source were still too low.

The power producer said it was considering options for its two other planned biomass plants in different locations in the UK.

The industry also suffered a setback in public perception this month after a fire ripped through RWE npower's new biomass plant in Tilbury, raising safety concerns and forcing the 750-MW plant to shut at least until the end of July.

E.ON's potential new power station will burn imported wood pellets, energy crops and locally sourced waste wood to produce electricity.

The company declined to give a start date for the plant given the review proceedings.

Ministers have identified bioenergy as a key fuel source in helping achieve Britain's aim to source 15 percent of its overall energy from renewable sources by 2020.

Biomass has potential to provide 30 percent of that target, the government has said.