VICTORIA'S brown coal stations will pocket billions in compensation over the carbon price, despite passing on the cost to electricity retailers.
In the first six months since the carbon price has been in place, generators have received $1 billion in government compensation money, says a report prepared for Environment Victoria by Bruce Mountain.
And they are set to receive billions more over the next four years, despite the generators passing on more than 100 per cent of the carbon price to electricity retailers through higher electricity prices.
The report by energy analysts CME estimates generators will receive windfalls of between $2.3 billion to $5.4 billion, depending on the future carbon price, unless the government compensation system is reviewed.
Environment Victoria says the scheme must be overhauled before the next compensation payment is made in September.
EV campaigns director Mark Wakeham told Fairfax Media it would be a terrible result for taxpayers and the environment if the dirtiest power stations are being enriched by compensation from the Energy Security Fund.
"The Gillard Government never intended for the compensation payments to be used as windfall profits, but that appears to be what's happening," Mr Wakeham said.
Climate Change Minister Greg Combet told Fairfax that Mr Mountain's work was designed to further political attacks on energy investors.
He said as the carbon price and renewable energy target increasingly drove clean energy investment, coal generators were expected to pass through less of the carbon price.
The Energy Security Fund was introduced by the federal government in 2011 to help the most emissions-intensive generators adapt to a price on carbon.
The Australian Energy Market Commission had argued that without the compensation payments, energy security would be at risk.
Mr Mountain said the view of economist, Professor Ross Garnaut, that the risks to supply caused by the carbon package was small, was sound.