The New South Wales Government's latest move on the electricity industry seems to fly in the face of government policies (including its own) to reduce greenhouse emissions.

Its decision to run a new coal mine in order to lock in cheaper coal prices for domestic electricity generators has sparked both puzzlement and criticism.

The formal announcement, that the New South Wales Cabinet had agreed to run the planned Cobbora Coal Mine in the state's central west, was made in a tender update about the sale of government-owned electricity retailers.

Cobbora is expected to have an annual output of 30 million tonnes.

The government had selected a private owner-operator, but could not reach agreement over coal prices, hence the takeover.

Now Greenpeace is outraged that taxpayers could be underwriting cheap coal for companies that want to buy the electricity retailers.

Spokesman John Hepburn says the Government is encouraging dirty coal mining pollution and increasing greenhouse emissions.

"They don't seem to be embarrassed by that fact," he said.

"It is possibly the most outrageous public policy decision in a generation."

The Opposition Treasury spokesman Mike Baird says the state's management of power generation and the retailer sale has gone from bad to awful.

"They knew that coal mining contacts were maturing. They did nothing to extend them," he said.

"Unfortunately people in New South Wales now have to pay for it and that is coming in the form of whatever discounts they are offering on the coal price."

However, investors know that the deliberate market-distorting mechanism of carbon pricing - to make high-emission energy generation less attractive - will eventually be put in place through federal policy.

New South Wales electricity generators already trade under the state Green House Gas Reduction Scheme which costs carbon emitters about five dollars per tonne.

The Climate Institute says the Cobbora decision creates what it calls a 'negative carbon price' as, while the state's emission scheme makes coal more costly, the government-run mine will supply coal at below market prices.

"China does the same thing, by subsidising coal while investing in renewable energy," says Deputy Chief Executive Officer Erwin Jackson.

"The government is making it hard for investors in renewable energy to come into the market by depressing the price of coal fired electricity."

Mr Jackson warns that New South Wales could miss out investments which will be created through the Federal Renewable Energy Target.

"Most companies are making strategic decisions about the low-carbon future, they are looking to the new industrial revolution - subsidising coal producers is looking in the wrong direction." he says.

The New South Wales Government is under pressure to receive much needed revenue from its troubled power sale and to keep electricity supply up, and prices down, but the Opposition Mike Baird says they will achieve the opposite.

"There's going to be upward pressure on prices, there's going to be significant inefficiencies in the market which in the long term is going to hurt us all," he said.