Pressure is on to protect workers from potential closures of power plants under the carbon plan.

The proposed power station can be built in the Latrobe Valley on the proviso that an existing station is shut down. Photo: Pat Scala

PLANS for a new coal and gas-fired power station in the Latrobe Valley have been put on ice after a legal ruling that it cannot be built until a deal is struck to shut an existing coal plant.

Energy technology company HRL announced it was freezing work on plans for a $1.2 billion coal gasification plant at Morwell in response to a decision last month by the Victorian Civil and Administrative Tribunal.

VCAT found HRL could build the plant to its preferred 600 megawatt capacity, overturning a decision by the Environment Protection Authority, but said work could not start until the federal government signed a deal to buy out and shut an old station using carbon tax revenue. The latest delay for the troubled six-year-old proposal places in doubt the project's government funding - the only known remaining financial backing for the plant.

Federal Resources and Energy Minister Martin Ferguson earlier this year gave the company until June 30 to meet the conditions of a $100 million grant, warning it would be the project's final extension. The unpaid $30 million portion of a $50 million state grant is contingent on the federal funding.

A decision on the "contract for closure" program to shut 2000 megawatts of brown coal power is also not due until June 30. Paul Welfare, general manager with HRL subsidiary Dual Gas, said the tribunal judgment "effectively put the future of the project in the hands of the Australian government". He said it was "a major concern for this project". "It is unclear what it means for the future of Victoria's Latrobe Valley," he said.

Both the federal and state governments said the delay was a commercial decision taken by HRL, and that they were considering the implications of the VCAT decision. Mr Ferguson said the government's funding agreement with the company would stand until the end of June. A Victorian government spokeswoman said the project was "only one of a number of coal gasification technology projects in the Latrobe Valley", and that the state would consider its involvement when the funding deal expired. The HRL plant would largely run on synthetic gas derived from brown coal using new technology. Its greenhouse gas emissions would be 46 per cent lower than Hazelwood, often described as Victoria's "dirtiest" coal plant, and roughly equivalent to a modern black coal plant or open-cycle gas-fired station.

Environment Victoria, which lost a VCAT bid to stop the project, called on the federal government to confirm it would not grant HRL a funding extension.

"HRL is losing money by the day developing this project, which relies on inefficient and out-of-date technology … there are cleaner and better projects on the table and ready to go," group campaigner Victoria McKenzie-McHarg said.