Eraring Power Station's life will be extended until August 2027 as part of a plan to support the rollout of clean energy infrastructure.
The deal will not require taxpayers to pay upfront to keep the plant running beyond mid-2025 but the state government could end up paying Origin Energy up to $450 million in compensation.
"We believe this agreement strikes the right balance, with an extension to operations enabling Eraring to continue supporting security of electricity supply in NSW through the energy transition, while making compensation available to Origin in the event economic conditions for the plant are challenging," Origin chief executive Frank Calabria said on Thursday.
Under the agreement, Eraring must generate at least six terawatt hours each year, the equivalent to the typical annual output of two of Eraring's four generating units.
Eraring will maintain its existing workforce of about 220 and commit to a maintenance plan including environmental protections.
Under the deal, should Origin elect into the scheme in March of both years and Eraring makes a loss then NSW taxpayers will compensate the energy company for 80 per cent of its losses - capped at $225m.
If Eraring makes a profit, Origin will pay the state government up to $40m.
Climate Change and Energy Minister Penny Sharpe said the "temporary and targeted" agreement was a good deal for taxpayers.
"This is a good deal for taxpayers as well as households and businesses," she said.
"This ensures the transition to renewables can delivered without exposing the people of NSW to blackouts or to price spikes."
The decision to extend the coal-fired plant's life follows this week's warning from the Australian Energy Market Operator (AEMO) that NSW faced increased reliability risks because major renewable energy projects are not coming online fast enough.
Lake Macquarie MP Greg Piper, who has been advocating for the plant to remain open, said he was comfortable with the arrangement.
"There has been a lot of concern among the workforce out there because of all the unknowns; this will give some surety of tenure to the workforce as they move on," he said.
Likewise, Lake Macquarie mayor Kay Fraser welcomed the extension and said the council was ready to work with the government and Origin Energy to ensure a smooth transition for the Lake Macquarie community.
"The postponement allows critical time to prepare for the plant's closure but I urge both state and federal governments to move quickly to ensure retraining pathways are in place for workers and to progress plans for the transition to renewable energy," she said.
"Governments were too slow to react to the initial closure date of 2025, as evidenced by this week's statement by the Australian Energy Market Operator warning of widespread blackouts if Eraring was to go offline next year."
Why Eraring needed to stay open
Positioned on the southern shore of Lake Macquarie, the 2880 megawatt plant has provided about 25 per cent of the state's energy needs since the early 1980s.
Origin sent shockwaves through the government and corporate sectors in when it announced in early 2022 that it was bringing forward the plant's closure by seven years to August 2025 .
In addition to full time employed at Eraring power station, an estimated 2000 people in the wider community are indirectly employed by its operation.
The state government has been in talks with Origin Energy since last September with the O'Rielly review of the state's energy transition recommended the government strike a deal to keep Eraring running to ensure the grid's stability.
The report highlighted the risk of losing 2880 megawatts of baseload power at a time when the energy grid is undergoing an unprecedented transformation.
Business Hunter chief executive Bob Hawes said the extension was "a wise insurance policy".
"Unfortunately, renewables are not being commissioned fast enough, and the risk of disruption to supply across this period was significant, with potentially catastrophic consequences for some users. We welcome this step as a sensible step to providing comfort for business and the community," Mr Hawes said.
"The timing of when we will achieve our renewable energy future is at times speculative, and this will hopefully embed some certainty."
Not everyone is happy about the extension
Clean energy advocates have highlighted modelling in recent months to argue that it would be possible to close Eraring in mid-2025 without risking grid stability.
In its report The Lights Will Stay On: NSW Electricity Plan 2024-2030 Think tank Climate Energy Finance found an unprecedented number of clean energy projects had come online over the past six months, which more than offset the loss of 2880 megawatts of coal-fired generation.
This includes super battery projects at Munmorah, Eraring and Liddell. These batteries will act as shock absorbers during periods of fluctuating generation and demand.
Hunter Community Environment Centre coordinator Jo Lynch said the extension of Eraring was deeply disappointing for communities living with the environmental and health impacts of coal power.
"The NSW Government has shown enough leniency to coal companies and this huge taxpayer handout for Eraring will prolong the ill effects of coal ash waste dumping and toxic stack emissions impacting community health, the lake ecosystem and our climate," she said.
An estimated 900,000 additional tonnes of coal ash waste is expected to be dumped in Eraring's ash dam to accommodate the 2 year extension.
Lyn Fraser, Lake resident and Secretary of Coal-ash Community Alliance said local communities deserved a cleaner environment.
It is not a good policy to throw more public money at the fossil fuel industry. Let's give our community, workers and the environment a better chance for the future. Let's clean up the exposed ash dams and focus on investment in renewable energy".
Research into the health impacts of coal power completed by Dr Ben Ewald in 2018, found that particulate pollution lowers the birthweight of an estimated 200 newborns, contribute to almost 300 premature deaths and 200 diagnoses of early onset diabetes per year.
Eraring remains in good condition
Unlike Liddell Power Station, which was allowed to run down following the decision to close it, a tight maintenance schedule been maintained at Eraring in the past two years.
"The plant is in very good condition, we continued to invest in maintenance and overhauls," Mr Calabria said.
"If you look at its performance even since 2022 it has been very good.
"While the team has done a tremendous job of operating the plant we just need to recognise that they still are not young. It remains an ongoing activity for us to keep it in good condition."
Coal supply talks ongoing
Mr Calabria said talks were continuing with a number of coal suppliers, including Centennial Coal, about suppling the plant for the next two years.
"It's important that we are able to source competitively priced coal," he said.
"We continue to be in discussions with Centennial and we hope we can reach an agreement which is broadly consistent with the terms with which we have secured other coal supplies."
Mr Piper said he hoped Origin could lock in a deal with Centennial.
"It's just in everybody's interest, in my view, for it to be with Centennial," he said.
"Hopefully Centennial can give a bit more thought to their costings and for Origin to consider that as well. We have to look after the workforce that has looked after us."
