The Victorian Civil and Administrative Tribunal (VCAT) has overruled a decision by the Environment Protection Authority (EPA) to limit the size of a new power station in the Latrobe Valley.
The energy company HRL applied to the EPA for works approval to build a 600 megawatt dual gas power station at Morwell.
The EPA restricted the size of plant to 300 megawatts because of the projected level of CO2 emissions.
HRL challenged the decision in VCAT calling for the full 600 megawatts.
At the same time environment groups challenged the EPA decision calling for the application to be rejected outright.
The Federal and Victorian Governments have committed $150 million in funding for the project but HRL has had problems raising extra capital.
The $750 million power plant would use gas produced from coal to run its turbines and natural gas as a start-up fuel, significantly reducing CO2 emissions compared with conventional coal-fired power stations.
In its ruling, VCAT said the EPA had "misapplied the principles of environment protection and best practice… in seeking to halve the capacity of the dual gas project".
The report also acknowledged the change in the Victorian Government's review of the Climate Change Act tabled in Parliament this week calling for a 20 per cent emissions reduction target to be scrapped.
Environment Victoria was one of four groups objecting to the HRL plant.
They challenged the EPA ruling saying the works application should be scrapped altogether.
A spokeswoman for the group, Kelly O'Shanassy, says her group will now find other ways to campaign against more coal-fired power stations.
"We're quite shocked and disappointed at the outcome and we disagree with the interpretation of the law in this case," Ms O'Shanassy said.
"We can't see how a new coal-fired power station can possibly be seen as best practice for the electricity sector and that was our major argument to VCAT."
She hopes the decision does not set a precedent.
"We wanted the EPA decision to be overruled as well, by not having any of the power plant approved, because we think there are much cleaner much better options out there that would be considered best practice," she said.
A spokeswoman for HRL said the company is reviewing VCAT's decision.