Xcel Energy just announced a new deal with Microgy, Inc that will allow Xcel to turn organic waste into methane to generate energy. The methane generation will take place near Xcel’s Fort St. Vrain Generating Station. A new methane plant will be built for this purpose, with construction slated to begin in 2010. Initially, the project will produce 915,000 MMBtu of methane, which is enough to power 17,000 homes per year.

Terms of the deal were not publicly disclosed, but the project should help Xcel reduce its CO2 emissions. The two companies released a joint statement describing the plan in more detail. Here’s an excerpt from the Denver Business Journal:

“Microgy will use an anaerobic digestion process to break down animal waste from a local dairy farm and other organic waste products, such as food processing residuals, from along the Front Range of Colorado,” the partners said in a statement Tuesday. “The waste stream will be converted to methane gas using the anaerobic digesters. In turn, the methane will be used to help produce electricity at Fort St. Vrain, Xcel Energy’s largest natural gas generation facility in Colorado.”