One of the largest electricity generators in New South Wales is teaming up with a company that makes algae to reduce its emissions and produce a renewable biofuel.

Algae Tec plans to take 270 000 tonnes of carbon dioxide a year from Macquarie Generation's Bayswater power station, rising to 1.3 million tonnes in the future.

The company's Executive Chairman, Roger Stroud, says the waste emissions, along with water and nutrients, will be used to perpetuate algal blooms in shipping containers on the site.

"Instead of going up the stack and out into our atmosphere, we're going to redirect it into the containers," he said.

"The oily algae coming out the other side will then be separated.

"The oil will be converted into biodiesel which can be used in the trucks in the Hunter Valley, or it can be taken down to Newcastle or Sydney and used in jets."