Cleaner-coal company GreatPoint Energy said Friday it raised an undisclosed amount of money from Peabody Energy (NYSE: BTU), the world's largest coal company.

GreatPoint said it will use the cash to develop its technology at commercial scale. Aside from the minority stake, the companies announced a strategic relationship in which Peabody will supply GreatPoint with coal and the two companies will consider developing joint coal-gasification projects using Peabody reserves and land.

It's quite a win for GreatPoint, which might have found a big customer, and also might help Peabody with its environmental hassles.

Peabody was one of five energy firms that New York Attorney General Andrew Cuomo subpoenaed in September as part of an investigation into whether planned coal-fired plants' greenhouse-gas emissions would result in previously undisclosed financial risks (see Coal Under Fire).

Amid a series of penalties for coal-fired plants without carbon controls, some coal companies are looking for solutions that might reduce their risks (see In Brief: Coal Gets Funding, In Brief: Tampa Cancels Gasification Plant, India Moves on Clean Coal, New Policy Could Put CO2 Underground and Cleaning Up Coal).

And companies with technologies to reduce pollution from coal, such as GreatPoint Energy, have been getting backing from investors. GreatPoint Energy raised $100 million in September and Luca Technologies closed $20 million in October.

The deal with Peabody is another vote of confidence for GreatPoint, which has developed a technology to turn dirty coal into cleaner-burning natural gas.

GreatPoint says it can remove sulfur, mercury and 60 percent of the carbon out of coal, making natural gas at a cost of $3 to $3.50 per million Btu. With February natural gas futures trading at $8.23 per million Btu on Friday, that leaves plenty of room for profit.

But there's still some question about what to do with the unwanted elements. While a market for mercury already exists, the viability of sequestering carbon and pumping it into the ground still is unproven.

Peabody, which said it is pursuing coal-to-gas projects to help build energy security and ease reliance on expensive natural-gas imports, also is working on carbon capture and storage. The company is partnering with FutureGen, an alliance of groups building a carbon-sequestration plant in the United States, as well as with GreenGen in China, Coal21 in Australia and the Asia-Pacific Partnership.

Last month, a FutureGen project announcement that it would build a plant in Illinois was met with a U.S. Department of Energy response saying it had not yet approved the location and was concerned about a $1.5 billion cost overrun (see Illinois to Get a Low-Emission Coal-Fired Power Plant and DOE Pulls Back on FutureGen's Reins). The department had said it expected to release further details about the project this month.

GreatPoint Energy isn't the only company hoping to replace natural gas with cheaper coal.

New York-based ethanol company Xethanol (AMEX: XNL) said earlier this week it invested $500,000 in Pittsburgh-based Consus Ethanol, which plans to build several ethanol plants powered by waste coal.

The company said using waste coal would produce corn-based ethanol for 48 cents less per gallon than a typical natural-gas powered plant in the Midwest. It added the "environmentally friendly design" of its plant has won the full endorsement of Pennsylvania, where it plans to locate its first such plant.

Xethanol didn't return calls requesting more information about the design or the emissions.