Sources close to the State Department of Environmental Quality Engineering (DEQE) said yesterday they will recommend that the Harvard-financed Medical Area power plant be allowed to install its diesel engines under certain environmental conditions.

The sources said DEQE staff members, who have been reviewing a Harvard-backed proposal, will most likely tell DEQE Deputy Commissioner David A. Fierra that he should allow the diesels to be installed.

In a November 30 decision, Fierra--who will make the final decision in the matter--rejected the power plant's proposal to install the diesel engines, but left an "escape clause" which allowed plant officials to draw up a plan.

The $175-million cogeneration plant, designed to supply energy to 13 Medical Area institutions--including Harvard's three medical schools and its affiliated hospitals--has been the subject of intense community controversy because of the allegedly dangerous levels of nitrous oxides it would emit.

Under the Harvard proposal, the power plant's diesel engines would have to be throttled back if the plant's nitrogen dioxide emissions exceed 320 micrograms per cubic meter--the safety level which Fierra established in his decision.

Sources say the proposal also calls for continual monitoring of the plant's emissions and provides for a guaranteed backup energy source if the plant's output is substantially reduced.

If Fierra approves the proposal, he will have removed the final obstacle in Harvard's three-year battle to build its cogeneration plant, the largest in North America.

In the past, community leaders have warned they will file suit to block installation of diesels if Harvard submits a proposal.

Fierra's decision provides for a 30-day comment period in which community leaders can raise objections to Harvard's proposal for diesel installation.

Michael Lambert, co-counsel for one of the community groups that has raised objections to the plant, said yesterday the DEQE is acting in a "highly inappropriate, wholly illegal manner."

"I don't believe Harvard can technologically comply with Fierra's conditions," Lambert added.

L. Edward Lashman, Harvard's director of external projects, yesterday declined comment on the latest developments in the situation.

Lashman said in December that if the power plant operates within the constraints set down by Fierra, it would lose between $1.5 and $2 million annually because of fuel inefficiency and backup energy costs.

Power plant officials first estimated that the plant--originally slated to cost $40 million--would save $2 million in its first operating year. Under the latest proposal, sources say the power plant could lose money in its first few years.