Cheshire West & Chester and Cheshire East Councils are talking to waste management firm Viridor about finding a solution to the problem of future household waste disposal in the county.
Viridor had been selected by both Cheshire West & Chester and Cheshire East Councils as their provisional preferred bidder to handle a 25-year contract worth £850m.
However, just as the two authorities were about to finalise a lengthy procurement process, the department for environment, food and rural affairs announced that it had decided to withdraw its provisional allocation of over £100m of PFI credits for the scheme.
Cllr Lynn Riley, community and environment executive member, said: "This legacy project took five years and around £4m of public money to reach this stage. In the light of the current situation, we need to examine all the options open to us.
"It is only commonsense that we should talk to the company that had been chosen after such a careful selection process, to see whether there is the facility within the current procurement to help overcome the funding shortfall."
In the meantime officers representing both authorities have met with Defra officials in London to discuss the Government's reasons for selecting the Cheshire scheme as one of seven to have financial support withdrawn.
Cllr Riley added: "I understand that the methodology employed by Government to arrive at that decision will not be published for two or three weeks.
"Our project team will review the information from the meeting with Defra and we will consider a report from officers before making recommendations on any further possible action.
"We cannot at this stage rule out a formal challenge against the decision to withdraw support for this crucial important scheme.
"At this stage only one thing appears to be certain and that is that PFI credits are a thing of the past. Those schemes that have been successful will be supported by a system of grants."
Cllr Peter Mason, cabinet member with responsibility for procurement, assets and shared services at Cheshire East Council, added: "This set back is very disappointing, especially as we have just chosen our preferred bidder for this contract.
"The project would have solved the problem of the disposal of Cheshire's household waste through this 25 year contract in an environmentally friendly way, avoiding the need for landfill."
Viridor had proposed a mechanical and biological treatment plant at the former Ineos chemical works at Griffiths Road, Northwich, which would recover the limited recyclable materials from household waste and use the remainder to produce a solid recoverable fuel.
This fuel could then be transported by rail from the mechanical and biological treatment facility to a purpose built power station to be constructed at Runcorn which in turn will generate energy for use in the Ineos works.
Another proposal was made by Resource Recovery Solutions, a joint venture between Interserve and United utilities, which opted not to revise its planning application for a facility in Cheshire in August, following an earlier rejection.