The coalition hopes a successful project could create up to 400 megawatts of energy and store gas in unused gas fields.
It is hoped that the new project could be up and running by 2014.
Andrew Duff, chief executive officer of npower, said "clean coal generation" is vital to move the industry forward and has the potential to allow coal to "play its part in the UK's long-term energy mix".
He added: "If carbon capture and storage can be proven at an industrial scale it would have major benefits."
npower recently announced it was reducing prices for its consumers on gas pre-payment meter, claiming the drops could save consumers an average of £30 per quarter.
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