An $8.7 million upgrade of Vales Point Power Station's turbines will reduce emissions, improve reliability and provide additional dispatchable power, according to the federal government.
But environment groups have labelled the project, which was funded in the Tuesday's budget, as "outrageous and unconscionable."
The upgrade, one of 12 projects identified under the government's Underwriting New Generation Investments program, will add an additional 30 megawatts of dispatchable energy generation for the wholesale market.
This will contribute to the 1000 megawatt target set by the government in response to the Liddell Taskforce findings.
The government hopes the project will be complete by the time AGL's Liddell Power Station closes in 2023.
It is also designed to provide grid stability for three summers before Snowy 2.0 comes online.
"We are committed to taking action to bring down power prices and increase the reliable supply of electricity to protect the hip pockets of households, and better support our job-creating businesses and industries," Energy Minister Angus Taylor said.
"The Vales Point Power Station is a major supplier of electricity in NSW. This grant will make Vales Point more reliable, more efficient and deliver much needed dispatchable power in NSW.
"Importantly, the upgrades will also reduce emissions by more than 1 million tonnes."
But Doctors for the Environment spokesman Dr Ben Ewald disputed the claim and described the project as an "outrageous misuse of public funds".
"The power station is highly polluting and highly profitable, having none of the sulphur dioxide and nitrogen dioxide pollution controls required of power stations in other countries," he said.
"It reaches the end of its engineering life in 2028, when the people of the Lake Macquarie and Central Coast regions should finally be free of its effects.
"Air pollution from burning coal is known to cause heart and lung disease, and to damage lung growth in children.
"Now that there are sources of electricity it makes no sense to drag out the transition process. The Hunter would have more and better jobs from supporting the renewable energy industries.
"The pollution from Vales Point also contributes to the climate emergency.
"Coal (and gas) exacerbates climate change which brings drought, extreme heat, coral bleaching, drying rivers, and bushfires like we experienced last summer."
Shadow Treasurer Jim Chalmers criticised the budget for not doing anything meaningful for cleaner and cheaper energy.
The Australian Conservation Foundation said gas was the clear winner in the budget, while climate action has lost out.
"We know the best way to cut the pollution driving global warming is to move away from burning coal and gas, yet this budget provides funding that locks in new fossil fuel projects," the organisation's chief Kelly O'Shanassy said.
