The Energy Brix brown coal power plant and briquette factory in the Latrobe Valley will be mothballed, with up 70 jobs to be made redundant as a result.
The almost 60-year-old plant had been operating on a $50 million federal government bailout package for the past two years and will now shut its doors from the end of the month with that assistance coming to an end.
On Tuesday plant owner HRL said the closure was "temporary" while it assessed the commercial viability of a new steam supply to make briquettes.
To date steam has been supplied from the adjacent power plant. Since July 2012 the power plant has been operating well below its capacity of 170 megawatts to supply the steam, and has not fed extra power into the energy grid as occurred in years past.
The briquettes are made of dried, compressed brown coal and are used in heating and steam raising for food processing and some operations in power stations. HRL supplies briquettes to the huge Hazelwood and Loy Yang A power plants in the Latrobe Valley.
HRL mananging director Gordon Carter said the decision had been made as a result of the loss of three major customers and low forecast wholesale power prices.
He said HRL was carrying out a feasability study into a new steam supply for the briquette factory, which will be finished by the end of the year. After that, a decision about the future of the site will be made.
HRL said the majority of the 37 workers based at the Energy Brix power station will be made redundant. A further 33 job losses were announced earlier this week by a separate company contracted to run the briquette factory.
Environmental campaigners are pushing for brown coal use to be phased out due to its high greenhouse gas emissions when burnt, even when compared to drier black coal. The Energy Brix power plant was responsible for 1.6 million tonnes of emissions a year when in full operation.
Environment Victoria chief executive Mark Wakeham said: "This closure of one of Victoria's oldest and dirtiest coal-fired power stations is the first in recent decades, but with massive oversupply of baseload generation and low wholesale electricity prices it's unlikely to be the last."