Eraring Power Station, north of Sydney, supplies around 25 percent of power for Australia's most populous state, New South Wales.
The facility had been earmarked for closure in August 2025 to help meet emissions targets and spur the transition to more sustainable, cleaner energy sources.
But a recent policy review found parts of the state's energy transition plan faced "multiple headwinds" and "the likelihood of success is low."
It predicted the loss of the coal plant would mean cost increases for electricity users.
The review said that average wholesale energy prices had increased since another coal-fired station, Liddell, closed in April.
New South Wales energy minister Penny Sharpe said the centre-left adminstration had accepted the recommendation and would enter talks with Eraring owner Origin Energy.
"The case for Origin Energy to extend its timeframe for Eraring is there," Sharpe said.
Climate Council chief executive Amanda McKenzie on Monday had urged the state government to shutter Eraring in 2025 as planned in order to meet emissions reduction targets.
Australia has vowed to reach net zero emissions by 2050.
Its carbon dioxide emissions per person are among the highest in the world at 15.3 tonnes, surpassing US levels, World Bank figures show.
"The renewable energy boom is our best shot at tackling the climate crisis," McKenzie said, adding the right policies could "create thousands of new clean energy jobs, drive down power bills" and "deliver reliable electricity supply for homes and businesses."
Around 70 percent of New South Wales' delivered electricity comes from four coal-powered plants scheduled to retire in the next 10 to 15 years.
Australia is currently the world's second-largest exporter of thermal coal, after Indonesia, and the largest exporter of metallurgical coal, which is used in steel making.
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