The NSW government will extend the life of the nation’s largest coal-fired power station until 2027 after securing an underwriting deal with Origin Energy.

Origin Energy had previously announced it would close the Eraring Power Station in the Hunter Valley as early as August next year, seven years earlier than previously expected.

Thursday’s announcement follows advice from the Australian Energy Market Operator that the state could face energy shortages after 2025 without Eraring because of the slow rollout of renewables.

“The NSW Government has secured an agreement with Origin Energy to operate the Eraring Power Station in the NSW Hunter Valley until August 2027,” Premier Chris Minns said in a statement.

“This will manage an orderly exit from coal-fired power to ensure the lights stay on for homes, businesses and industry while NSW delivers the transition to low-cost, reliable renewable energy.

“A temporary extension of Eraring will provide time to deliver the renewable energy, storage and network infrastructure projects required to replace the power station.”

Profits and losses to be shared

Under the opt-in deal Origin will produce at least 6 terrawatts of electricity each year, with the state underwriting the power station to share profits and losses .

If Origin opts in the government will compensate it for losses up to $450 million over the two years, capped at $225 million a year.

If Eraring makes a profit in that year, Origin must share 20 per cent of the profit with the State capped at $40 million.

Treasurer Daniel Mookhey denied the government was simply handing Origin a cheque.

“Instead, this agreement incentivises Origin to only use the underwrite if there is a sudden change in market conditions,” he said.

Origin has given notice it now expects to close Eraring on 19 August 2027.

It must permanently deregister Eraring’s generator units from participating in the National Electricity Market by March 2029 in line with the state’s legislated emissions reduction targets.

‘Failure of climate leadership’

The Climate Council has labelled the decision to keep Eraring operating past its scheduled 2025 closure as a failure of climate leadership that sends the wrong messages about combating climate change.

“This decision is a triple failure,” Climate Councillor and Economist Nicki Hutley said.

“It fails policy, it fails climate leadership, and it fails to protect the health and wellbeing of communities across NSW and the nation.

“As a result, every NSW taxpayer will bear the financial burden of this decision, which undermines climate targets for both NSW and Australia and delays the shift to cleaner, lower cost energy.”

But Mr Minns has defended the decision, saying the government’s position had always been to extend Eraring if that’s what was needed to keep the lights on in NSW.

“The people of NSW now have certainty that the NSW Government has a plan to ensure we have reliable energy while we transition the workforce and the economy to net zero.”

Climate minister Penny Sharpe said it was necessary to get new renewable infrastructure and storage capacity online before coal-fired generators are retired.

“This temporary and targeted agreement will provide financial support only if it’s needed, and only for as long as needed, during an orderly exit of coal-fired power,” she said.

“This is a proactive and sensible step to ensure a plan is in place, if needed, to avoid electricity outages and rising power prices.”