An independent report, released on Tuesday, recommended the state work with the owner of Eraring Power Station on the state's Central Coast to keep it operating beyond its planned closure date of 2025.
It found the state would face electricity reliability challenges in the coming years as coal-fired power stations went offline.
The report also predicted shutting Eraring would lead to higher energy costs for households and businesses because of the hit to the electricity supply.
The state government said it would engage with Origin on its plans for the power plant, while also investigating alternative solutions to deliver more renewable energy generation, transmission and storage.
Energy Minister Penny Sharpe said it was not yet clear how many more years Eraring would need to keep functioning beyond 2025, or how much it would cost taxpayers to prop up the facility.
"The (report) makes it clear that the case for Origin Energy to extend its time frame for phasing out Eraring is there," she said.
"But we come from the starting point of not wanting coal fire to be open one day longer than it needs to and not one extra cent needing to go into it from the people of NSW."
The government has dismissed claims from Liberal MP and former state treasurer Matt Kean that extending the life of Eraring would cost taxpayers $3 billion in subsidies over three years.
Ms Sharpe said the ultimate decision to keep Eraring open was up to Origin and its commercial considerations, but she slammed Mr Kean's comments as speculation.
In commissioning the independent report in May, Labor noted several factors, including competition for investment and skills shortages, had made delivering the energy transition more difficult.
The report pointed to a 450-megawatt shortfall in the state's energy supply in 2025-26, and a 560MW shortfall the following year with Eraring's closure.
Premier Chris Minns said the government was committed to achieving its target of net zero carbon emissions by 2050.
"One of the biggest challenges facing NSW is ensuring we keep the lights on while managing the biggest change in energy mix and consumption in the shortest period of time in our nation's history," he said.
"This report and the government's response rescues the renewables mission and puts the transition back on track."
The Eraring Power Station, near Newcastle, has a generating capacity of 2922MW and supplies about 25 per cent of the state's electricity needs.
It was acquired from the NSW government by Origin Energy in 2013.
Last year, Origin said it planned to retire the facility in August 2025 and install a large-scale battery at the site.
Greens energy spokeswoman Abigail Boyd said the report showed Eraring did not need to be kept open if there was a rapid roll-out of renewable energy sources.
"What we need is a clear transition plan for closing down our coal-fired power stations, taking into account not just energy reliability, but also the quickest way to bring down our greenhouse gas emissions while still supporting workers and communities," she said.
Climate Council chief executive Amanda McKenzie said extending the life of Eraring would be a disaster, costing taxpayers while also encouraging the operators of other coal-fired power plants to apply for handouts.
"Investing in renewables will power the state for a generation, while money into fossil fuels will go up in smoke," she said.
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