UPDATE 1-International Power to buy Canadian wind-farm developer

* To buy AIM PowerGen for C$119 mln in cash * Expects acquisition to enhance earnings

* Renewable Energy to use proceeds to fund UK operations

* Deal expected to close by end of year * Renewable Energy shares up 20.8 pct (Adds details)

Sept 30 (Reuters) - Power generation firm International Power Plc (IPR.L) said on Wednesday it agreed to acquire AIM PowerGen Corp, the Canadian unit of British wind-farm operator Renewable Energy Generation Ltd RERWE.L, for C$119 million in cash.

Shares of Renewable Energy were trading up 20.8 percent at 52.25 pence, while International Power was almost flat at 295.5 pence at 0731 GMT on the London Stock Exchange.

The company said it expects the acquisition, which would be completed by the end of the year, to be immediately free-cash-flow positive and add to earnings once the 40 megawatt Harrow project in Canada is completed in 2010.

International Power said it would fund the acquisition from existing cash resources.

Renewable Energy said it would use the proceeds from the sale of the unit to fund ongoing activities in the UK, including generating power from refined, used vegetable cooking oil.

The money would also be used to repay its facility with Bank of Scotland Plc.

"The transaction will allow us to proceed quickly to the construction of the Goonhilly Downs and Loscar wind farms," Renewable Energy CEO Andrew Whalley said in a statement.

AIM PowerGen currently owns four operational windfarms which it has developed, with a total installed capacity of about 40 megawatts. (Reporting by Tresa Sherin Morera in Bangalore; Editing by Vinu Pilakkott)