The plan will leave a $5 million hole in the ACT budget through loss of tip fees, but Environment Minister Simon Corbell said the shortfall would be made up in savings through not having to run a landfill anywhere near the size it was now.

The Mugga Lane plant would use virtually all of the non-recyclable rubbish, leaving only intractable rubbish such as asbestos, he said. Overall, more than 90 per cent of Canberra's rubbish would be either recycled or converted.

The government has already called for expressions of interest in the plant and is confident it could produce 23 megawatts of energy to be fed back into the grid, enough to power more than 15,000 households.

Mr Corbell is crunching the numbers to ensure the loss of tip fees can be offset through lower landfill costs. If the numbers stack up he will run an auction next year to choose a company. The project would need to deliver a net benefit to the territory to go ahead, he said.

The winning bidder would have a similar deal to the solar and wind projects supported by the government, with a guaranteed feed-in tariff for energy sent back into the grid. Mr Corbell wants the bioenergy plant in operation within six years.

The government would continue collecting rubbish at the kerbside, and delivering it to the plant, where it would go into ''essentially a very large shed'' for conversion to energy. A technology called gasification converts food, organic, wood and other rubbish into gas, mainly methane, through heating rather than burning. The synthetic gas can be turned into energy to be fed back into the grid.

Another possibility is pyrolysis, which converts wood waste into charcoal, which can then be used to improve soils.

The plant would reduce greenhouse gas emissions from ACT landfills by more than 70,000 tonnes a year.

Mr Corbell said while the technologies were widely used overseas, only small-scale plants were operating in Australia, generating three to five megawatts.

Sustainable energy consultant Toby Roxburgh, a member of the government's climate change advisory panel, said the project could be a leader in Australia. In the US and Europe, bioenergy was tried and tested, but here it had been held back by lack of political commitment - bioenergy companies needed a guaranteed fuel source - and by the space available for landfill, he said. Technology was far enough advanced to ensure bioenergy plants were clean and safe enough even for use in residential areas.

''My personal view is it's a good idea - waste isn't waste, it's a resource,'' he said. ''It's going to be financially beneficial for the ACT and it's great that it's happening.''

The plan was cleaner than incineration, cheaper than landfill and commercially viable.

''It stacks up financially for companies to do it, so there's keenness in the market,'' Mr Roxburgh said.

Anthony Vassallo, professor of sustainable energy development at the University of Sydney, said the ACT would be well ahead of other jurisdictions in providing a feed-in tariff for electricity produced in this way.

On the positive side, it meant recovering valuable energy from material that would go into landfill, but you had to be careful that people continued to recycle, he said. Emissions also had to be carefully handled, ensuring rubbish was treated to remove contaminants. And he pointed out that the plant would still produce carbon dioxide.

''But it's giving a hand up to technology providers because obviously they're getting their resource, their input for free - the government is doing without the fees it would get from landfill, so that's a cost, but then it's not required to find and maintain and build landfill, which is a positive thing,'' he said.

Each year Canberra sends more than 100,000 tonnes of organic waste to landfill.