The government of New South Wales (NSW) in Australia has reached an agreement with Origin Energy to extend the operation of the 2.92GW Eraring coal-fired power station until at least August 2027.

This extension, which could cost up to A$225m ($149.5m) annually, is aimed at ensuring the security of the state’s electricity supply during the energy transition.

Origin Energy has committed to producing a minimum of 6 terawatt hours of power annually from the Eraring plant at Lake Macquarie.

This represents 3% of the total generation in the eastern states’ national electricity market.

The Australian energy market operator’s analysis, cited by the government, indicates that without Eraring, NSW would face energy reliability risks starting in 2025.

The agreement is designed to be temporary and targeted, providing a buffer period to develop the necessary renewable energy, storage and network infrastructure to replace the power station.

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The government has clarified that there will be no upfront payments made to Origin for operating Eraring.

Instead, an underwriting arrangement has been established in which Origin will pay the government one-fifth of the operating profits, up to a maximum of A$40m ($26.6m) per year, if the plant is profitable during the extension period.

If the plant operates at a loss, Origin may claim subsidies for the plant’s operating and capital expenses, with a cap of A$225m annually.

Origin has the option to continue running the plant until 2029, but the state will not offer any compensation beyond August 2027.

The plant’s extension aligns with Origin’s 2030 emissions reduction targets and its goal to achieve net-zero emissions by 2050, as detailed in its Climate Transition Action Plan.

Origin Energy CEO Frank Calabria stated: “We believe this agreement strikes the right balance, with an extension to operations enabling Eraring to continue supporting the security of electricity supply in New South Wales through the energy transition, while making compensation available to Origin in the event economic conditions for the plant are challenging.

“This agreement supports Eraring to continue to play an important role in maintaining reliable power for businesses and households through a period in which there remains considerable uncertainty about the volume and timing of new renewables, transmission and firming infrastructure coming online.”

Climate Change, Energy and the Environment Minister Penny Sharpe said: “New South Wales is stepping up the transition to cheap, clean, reliable renewable energy.

“But to keep the lights on and prices down, we need to make sure new renewable infrastructure and storage capacity is online before coal-fired generators reach the end of their life.”