Origin Energy on Tuesday said extending Eraring's operation to 2029 would reduce risks to system security highlighted by grid operator AEMO in a recent report.
The decision provided more time for renewables, storage and transmission projects to be delivered, Origin chief executive Frank Calabria said in a statement to the ASX.
It also reflected uncertainty about the reliability of Australia's ageing coal and gas fleet.
"We've taken the decision to extend Eraring's operations after assessing a range of factors including the needs of our customers, market conditions and the important role the plant plays in the NSW energy system," Mr Calabria said.
The 2880-megawatt plant - Australia's largest by power output - sits on the banks of Lake Macquarie, south of Newcastle, and was initially slated to close in 2025.
But that was pushed out to August 2027 after the NSW Labor government struck a $450 million risk-sharing deal for the ageing coal-fired facility.
Under the deal, NSW would cover a percentage of losses up to $225 million per year if given advance notice by Origin.
NSW Labor has said allowing the power station to close on its 2025 schedule would have put enormous pressure on the grid, energy prices and households.
But positive market conditions have meant Origin has not needed to activate the security blanket, which is due to be torn up in August 2027.
Extending the life of Eraring is not expected to impact Origin's 2030 emissions reduction targets, the company said.
Origin paid $75 million to take over the power station between Sydney and Newcastle when it was privatised in 2013.
The site is being converted to host a 700MW battery, which is expected to provide an average of 4.5 hours of storage capacity by mid-2027.
About half of the national electricity grid is powered by black coal-fired power stations like Eraring.
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