Highland Council have announced that the Caithness Heat and Power scheme is to be scrapped.
The council said that the biomass technology, which used waste wood to generate electricity and hot water, was unlikely to deliver the power needed for the community scheme.
Council officials will now develop technical assessments and associated business cases on options for the creation of a new district heating system, including using biomass and will identify potential new partners to provide the technology.
The council has notified the 247 households that are currently served by the plant.
Council convener Sandy Park said in a statement: "It is a major disappointment to us that we now have to face the reality that the technology originally chosen for the project is not capable of reliably and economically fulfilling its objectives.
"Since taking over the project, the Council has invested significant funds and a great deal of staff time to find a way to make the electricity generation component work, including a major operational trial in November of last year.
"But it is clearly not fit for purpose, and we will now close down this part of the project and focus upon identifying how best to provide heating to these homes."
Mr Park said that there would be an independent audit of the project and that the findings would be reported to the council and the public.