The European Union (EU) has approved Latvia's proposal to offer aid for the development of a 400MW power plant, expected to decrease the country's reliance on Russia for gas.
Latvia will provide a direct financial grant to the company that wins the tender, which will be expected to run the plant for at least 6,000h per year.
The thermal power plant will operate on natural gas or solid fuel such as lignite, coal or peat blended with at least 10% biomass.
Competition commissioner Neelie Kroes said the EU recognised the exceptional circumstances of the electricity market in Latvia.
"I am satisfied that the new thermal power plant will contribute to the security of electricity supply in the Baltic region without unduly distorting competition," Kroes told Reuters.