HARRISBURG - Gov. Ed Rendell said Thursday that his administration has cleared the path for construction of the nation's first commercial plant that will convert waste coal into zero-sulfur diesel fuel and home-heating oil.

Administration officials said they will join with private businesses in a consortium that will buy most of the fuel that is produced. The move should qualify the project for federal loan guarantees in financing most of the $612 million project in Mahanoy Township, Schuylkill County, about 50 miles northeast of Harrisburg, they said.

Language that effectively reserved the guarantees for the project was included in the federal energy bill that President Bush signed two months ago, and the assurance of in-state markets for nearly all the fuel gives prospective investors an extra margin of comfort, said state Environmental Protection Secretary Kathleen McGinty.

"Wall Street doesn't put a nickel in unless the company is going to have an attractive product that people are going to buy," said McGinty, who joined Rendell and business executives involved in the project at a Capitol news conference.

Waste Management and Processors in Gilberton plans to begin construction of the plant next spring. Using an updated version of technology first developed by German scientists in the 1920s, it will transform waste coal, or "culm," that has piled up in Pennsylvania's coal regions into cleaner-burning diesel fuel and home-heating oil.

The process involves mixing gasified waste coal with oxygen and water, then heating it to 2,500 degrees Fahrenheit to produce a synthetic gas. The gas undergoes another chemical reaction to become paraffin wax, which is refined into diesel fuel.

The state has agreed to buy 15 million gallons a year of diesel to fuel its vehicles and oil to heat its buildings during the next 10 years. Most of the rest is expected to be bought by other consortium members, which include Worley & Obetz, a Manheim heating-oil company, the Keystone Alliance, a fuel-purchasing group for the trucking industry, and other unidentified businesses.

"Thirty-eight million of the 40 million gallons are spoken for," McGinty said.

Consortium members are likely to get better prices than they would otherwise pay, McGinty said, adding that wholesale prices for diesel fuel start at around $1.65 a gallon.

"This plant breaks even at $1 a gallon," she said.

Rendell said the plant not only represents a major step toward energy independence, but it will provide jobs - an estimated 1,000 construction workers will be hired, and the plant will provide 600 permanent jobs - and help reduce pollution of rivers and streams.

John Hanger, president of the statewide environmental group PennFuture, said converting waste coal into other fuel is better than the alternatives. He said the downsides are outweighed by the benefits of reducing water pollution and producing cleaner-burning fuel.

"There's no way of making energy that has zero impact on the environment," he said.

Currently, there is an estimated 258 million tons of culm piled on more than 8,500 acres in northeastern and southwestern Pennsylvania. The waste coal - the smallest pieces, left behind when the marketable coal was sifted out - "produces nothing but environmental problems for us," the governor said.

Rendell said the project reflects his administration's commitment "to lead, not follow."

"Today, we are delivering on that commitment with an innovative energy solution that will mean cleaner, cheaper diesel fuel, more than 1,600 jobs and the use of acres of waste coal that now threaten our environment," he said.

Besides the $465 million that is expected to be covered by the federal loan guarantees, the state has earmarked $47 million in tax credits for the project. The U.S. Department of Energy has committed $100 million in grants.