The owner of one of Victoria's biggest coal-fired power stations is slashing its generating capacity by a quarter.
EnergyAustralia says it is cutting the Yallourn power station's output in the Latrobe Valley because of rising costs and a drop in demand.
Until now, the station has generated about a fifth of the state's electricity.
EnergyAustralia's spokesman Michael Hutchinson says only three of the four units at Yallourn will generate power.
"When the economy goes soft and demand sort of drops off, that puts some pressure on the actual economics of the operations," he said.
"With the falling demand and the cost of carbon that comes into our operation, our operating costs have increased significantly, so we're looking at a different way of operating the plant to look at how we can actually move it to an economically viable operation.
"We'd be hoping that the economy picks up and demand picks up."
Last month the Federal Government abandoned plans to pay power generators to shut some of the country's dirtiest plants, saying the deal would not bring value for money.
Environment Victoria's Mark Wakeham says the cuts are a sign that the Federal Government's carbon price is influencing business decisions.
"It's good news as far as emissions are concerned," he said.
"If that situation is maintained over the next year, emissions in Victoria will drop by about four million tonnes, however the closure is temporary at this stage.
"The unit is going to be mothballed and could come into production at some future time."
Premier Ted Baillieu says he is concerned about the security of Victoria's long-term electricity supply under a carbon tax.
"This is an unfortunate signal to the future if the carbon tax is having an impact in this way," he said.
"This obviously has an impact, a potential impact, on capacity and the price of electricity, and I think that's what we're getting out of this announcement.
"It will certainly reduce capacity and that in turn limits the reliability, because if you don't have the spare capacity then obviously reliability becomes an issue."