Just when you thought Railpower Technologies Corp. was derailing, one of Canada’s largest pension funds has stepped up to inject $35 million into the struggling maker of hybrid locomotives. Ontario Teacher’s Pension Plan said late Friday that it made the investment because of Railpower’s “market potential” and what it sees as increasingly stringent environmental regulations targeted at the rail sector.

It’s been a rough ride for Quebec-based Railpower, which has developed hybrid yard-switching locomotives and is beginning to apply its clean technology to cranes and tugboats. Back in January 2006 the company was trading at a high at $6.60 (Canadian), and from there it’s been a downward spiral to 21 cents. Production delays and expensive recalls spooked investors, and many analysts have since written the company off. This latest private placement, however, is a vote of confidence in Railpower’s technology and earnings potential. It’s also a much-needed lifeline.

Perhaps the Teacher’s pension is betting Railpower will be bought out by a larger company, such as General Electric, at a premium. Perhaps it believes Railpower has legs as a standalone company as it goes after the 6,000 aging switching locomotives in North America and 10,000 crains that are prime candidates for a hybrid retrofit. Rising fuel prices and new regulations are certainly key drivers for making this happen.

Trading at 23 cents on the Toronto Stock Exchange as of Friday’s close, Railpower has a market cap of just $21 million, even though it had revenues of $37 million in its last quarter alone. The problem is that it also had $34 million in losses. But once the company works through the recalls and gets back on track, the upside could become quite significant — assuming Railpower’s existing and potential customers don’t lose the faith.

ADD: First trading day after Railpower announces its funding… well, well, well… an 83 per cent jump. Seems somebody is happy about the announcement.