The Australian federal government will no longer be pursuing a contract that seeks to pay out the country's dirtiest coal-fired power generators fter negotiations with their respective owners bogged down.

Negotiations with Hazelwood owned by International Power and Yallourn owned by TRUenergy broke down after the federal government failed to arrive on an agreed price. The negotiations were further complicated by the current dip in international carbon prices.

"The contract for closure negotiations have taken place constructively and in good faith, but there remains a material gap between the level of compensation generators have sought and what the government is prepared to pay," Resources Minister Martin Ferguson said in a statement on Wednesday.

The government had targeted to close five major power stations and had been in talks with its owners. Talks extended in late June when a deal could not be reached ahead of the July 1 deadline. The companies involved for the closure contracts were Alinta Energy, HRL, Hazelwood Power Partnership, RATCH-Australia and TRUenergy.

The contract for closure program aims to pave the closure of 2,000 megawatts of highly emissions-intensive generation capacity by 2020.

But a June 30 deadline set to achieve a deal came and went with no clear and final arrangement. An undisclosed amount for the closures had been reserved by the federal government in its budget contingency reserve.

Environment groups, meanwhile, on Wednesday said the companies involved in the contract for closure program must not receive any other carbon tax compensation if they didn't accept payments to close down generation.

"If these facilities now claim they have a profitable future and their asset values remain high, then there is no public policy justification for the compensation payments that are coming at great cost to Australian taxpayers," Environment Victoria Campaign Director Mark Wakeham said in a statement.

Mr Wakeham likewise said the failure of talks will bear an imprint on the government's emissions reduction policy.

"If the Government fails to deliver on that key plank of the package, the package will start falling apart and elements of the package, like the $5.5 billion compensation that power stations like Yallourn and Hazelwood are now receiving will come into question," he said.

Four stations in Victoria's Latrobe Valley received $1 billion to help coal-fired generators survive with the carbon tax, including Hazelwood $266 million, Yallourn $257 million, Loy Yang Power $240 million and Loy Yang B $117 million.

It was the first tranche of assistance from the federal government's $5.5 billion energy security fund.

It will be followed by annual allocations of 42 million free carbon permits from 2013/14 to 2016/17 to assist highly emissions-intensive power stations.

Australia, which contributes just 1.5 per cent of global emissions, however has developed the world's biggest per-capita carbon emitter, no thanks to its reliance on coal to supply 80 per cent of its electricity requirements.

It introduced a carbon tax on July 1, with plans to change to a floating carbon price effective July 2015, as part of efforts to eradicate carbon emissions and battle global warming.

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