A dual green hydrogen-gas power plant will be built in NSW's Illawarra region, helping replace the Liddell coal-powered station when it shuts in 2023.
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The NSW government will tip $78 million into the Tallawarra B project, while the federal government will spend $5 million to make it hydrogen-ready.
From 2025, EnergyAustralia will buy "green hydrogen" power - in which renewable energy is used to split water molecules and extract energy - equivalent to more than five per cent of the plant's fuel use.
That is about 200,000 kilograms of green hydrogen per year.
Deputy Premier John Barilaro said the plant would power 150,000 homes at peak times and inject $300 million into NSW's economy.
"NSW has an enormous opportunity to lead the world in the production of green hydrogen," Mr Barilaro said in a statement on Tuesday .
"Fast-tracking new projects like these will ensure we continue to remain at the forefront of developing new technology while supporting our existing industries."
NSW Energy Minister Matt Kean said the project would dispatch 300 megawatts of electricity for use in NSW after the closure of the AGL-owned Liddell plant at Muswellbrook in the Upper Hunter.
EnergyAustralia also said it would study the potential to upgrade Tallawarra B so its future fuel mix could incorporate more green hydrogen.
Federal Energy Minister Angus Taylor welcomed the announcement, saying in a statement that it marked "the first dispatchable energy generation project to be built in NSW in over a decade".
But Independent NSW MP Justin Field said the government should disclose the subsidy deal it reached with EnergyAustralia for the project.
He said the project was "green" in name only and the government should instead replace Liddell with renewable energy, rather than mostly gas-fired power.
"EnergyAustralia will be seeking to make a profit from this predominantly gas-fired power station while the taxpayer is on the hook to the tune of $83 million to reduce its environmental footprint," Mr Field said in a statement.
The NSW government last month announced it would invest $750 million over the next decade to encourage industries to lower emissions.
Of this, NSW will spend $50 million over 10 years to develop the green hydrogen sector and guarantee the industry access to cheap renewables.
The state is pursuing a net zero target by 2050.
Australian Associated Press
