In an interview on Wednesday Mr Taylor said the "new set of rules" that come into effect on July 1 place an obligation now on electricity retailers, including AGL which owns Liddell, to meet customers' future need for dispatchable, 24-hour electricity or face penalties.

"Now in NSW where Liddell is, that means Liddell will either have to be replaced or extended. One or the other. Because if it doesn't they'll be in breach of this obligation which was laid out," Mr Taylor said.

"So there is very hard work being done right now by the energy companies to sort this out. The government will be looking very closely at it to make sure it's done right. There are serious penalties incurred if it's not done right."

Grattan Institute energy director Tony Wood said Mr Taylor was saying the retailer reliability obligation "will require that electricity retailers have enough capacity contracted to cover their customers' requirements into the future".

"He is not putting the obligation on the owner or Liddell but on the retailers, although AGL is both the owner and one of the retailers."

Mr Taylor was confirming in a firm way what was intended by the new legislation, Mr Wood said.

AGL declined to comment but directed the Newcastle Herald to its $1.36 billion NSW Generation Plan to replace Liddell power with an upgrade to nearby Bayswater power station, projects on the Liddell site including battery, gas peaker, wind, solar, pumped hydro and demand response projects.

AGL said replacing Liddell rather than extending it delivered a more affordable solution for consumers, with an estimated $83/MWh for power under a repurposed Liddell compared with $106/MWh if its life was extended.

NSW Labor energy spokesperson Adam Searle said Mr Taylor's comments were extraordinary after repeated attacks by the Coalition on AGL after it planned an orderly shutdown of the country's oldest power station in 2015.

"Rather than making threats the Federal Government should be producing energy policies to ensure we get the investment into the market that we need," Mr Searle said.

"Federal and state Labor both have energy policies that provide the market with the certainty required to support the investment that's needed.

"The market is failing because it's not investing enough and it's not investing because neither the federal or state governments have policies which allow it to happen."

Hunter MP Joel Fitzgibbon accused Mr Taylor of being "deliberately confusing" about AGL's different responsibilities as a generator and a retailer. The government was "all spin and no action" on energy, he said.

"You only have to look at the six years of investment uncertainty under the Abbott-Turnbull-Morrison governments and the games they played on energy policy to know this government has no credibility when it comes to telling others what they should be doing," Mr Fitzgibbon said.

"AGL is scrambling, with my encouragement, to build the additional capacity it needs."

In September 2017 the then Turnbull Government initiated a sustained attack on AGL for announcing it planned to close Liddell power station in 2022 because it was past its operating life.

Former resources minister Matt Canavan called the company the "biggest hypocrite walking around Australia" and prime minister Malcolm Turnbull considered plans for another company to buy Liddell and keep it open.