Environment Victoria, which released the independent report, said the research was prompted by the health effects of the 2014 Hazelwood mine fire.

The report calculates the social costs of each electricity generator in Victoria and highlights the importance of accounting for these externalised costs when considering the state's future energy mix.

“The historical dominance of brown coal generators like Hazelwood in Victoria's energy market is based on their very low private costs, driven by cheap and plentiful fuel and low operating costs," the report noted.

“However, this is only part of the picture, ignoring the significant external costs that these generators impose to human health, the environment, climate change and public infrastructure.”

The ‘true’ cost of Hazelwood

Hazelwood forms the central case in the report, which attempts to determine the brown coal generator's true cost in both private and social terms.

While researchers found very low private short run marginal costs – in the order of $3MWh, they noted "very high external costs".

"Our central case estimates of the external costs of carbon emissions and air pollutants are $64/MWh and $8/MWh respectively. This gives a social marginal cost of $75/MWh and social average unit cost of $87/MWh - well above the current Victorian wholesale electricity price of – $30/MWh," researchers said.

"This means Hazelwood imposes an external economic cost on Australians in the order of $900 million per year and over $2.5 billion in our high case estimates."

Hazelwood's owner, GDF Suez Australian Energy rejected the report, with a spokesperson telling The Age newspaper that the authors made no attempt to verify any information with the company.

"Unfortunately, the report ignores the very significant economic benefit attributable to Hazelwood, which generates up to 25% of Victoria's electricity needs, which in turn is a major benefit for the Victorian and national economics economies," the spokesman told the newspaper.

"It is important that any debate on the future of the Australian electricity industry is properly informed and balanced and based on factual information."

Transitioning to clean energy

Hazelwood may be the focus of the report, but it also calculates the social cost of pollution from other plants across the state.

And while supporters of coal power, including Prime Minister Tony Abbott believe it is a cheap and reliable power source, Environment Victoria safe climate campaign manager Dr Nicholas Aberle reiterates that this is only because power plants across the state have not factored in external social costs.

"Victoria's old and polluting power stations are continuing to operate well past their use-by date. They've got every incentive to hold on because they're cheap to run, but they're not paying for any of the pollution or damage they create," Dr Aberle said.

“It has been known for a long time that burning coal causes health and environmental damage, but this is the first time research has attempted to quantify that cost in Victoria.

“The modelling shows that the large power stations in the Latrobe Valley are responsible for costs between $500 million and $1.2 billion each in health and environmental damage every year. At Anglesea, where the biggest problem is the sulphur dioxide, we see health costs of $170 million per year from a very small, and now redundant, power station."

The report concludes by noting that a failure to price environmental and air pollution costs “is distorting the market and preventing a shift to cleaner generation.”

The Australian Energy Market Operator announced last year Victoria has around 2000MW of surplus generation capacity that is no longer needed to ensure security of supply. As a reference point, Hazelwood and Yallourn power stations are 1600 and 1480 MW respectively.

“We now have more electricity generation capacity than we need in Victoria, which is stalling investment in new renewable energy projects. In the interests of reducing our carbon pollution and our air pollution, we need strong federal and state leadership on how to resolve the stagnation of our energy sector,” Dr Aberle said.

“Generators are reluctant for their power stations to be the first to leave the energy market – it means their competitors benefit, and it will trigger significant rehabilitation costs to clean up the mines left behind. Government intervention and regulation is needed to overcome these barriers."

Dr Aberle added that extensive government support would also be needed to help coal-dependent communities diversify their economies as power stations are retired.

“The last time we had a big shake-up of the electricity sector in Victoria, the Latrobe Valley was hit very hard with job losses during privatisation. This time around, the region needs to be supported with a broad economic development plan to ensure a smooth transition to a clean economy," he said.