A new gas-fired power station in NSW won't get the tick of approval until the impact its emissions and pollutants have on air quality are assessed.
The federal government last year gave the energy industry a deadline to come up with a proposal for a gas plant by the end of April.
Energy Minister Angus Taylor has said that the government would build a gas project if the private sector does not.
Government-owned Snowy Hydro has put a proposal forward to build a power station in Kurri Kurri where an aluminium smelter used to be.
The proposal has been declared a critical infrastructure project for NSW under its environmental planning laws, meaning it is considered essential for economic, environmental or social reasons.
On Friday, an official from the federal department wrote to the NSW planning minister's team saying environmental approvals would have to be granted before the power project could proceed.
"The proposed action is likely to have a significant impact on the environment," the letter said.
This includes "generating emissions and pollutants which may impact air quality, and potentially disturbing contaminated and/or acid-sulphate soils in the proposed action area with potential flow on impacts to surface or ground water."
On Monday, federal infrastructure department officials were asked about the Kurri Kurri site, which is owned by a company run by former Newcastle mayor Jeff McCloy.
Mr McCloy resigned from that role in 2014 after fronting NSW's corruption commission, where it was revealed he illegally donated tens of thousands of dollars to MPs in the lead-up to the 2011 state election.
"Is the department aware the prospective owner of the site, Mr Jeff McCloy, of McCloy group, is a major Liberal Party donor," Labor senator Jenny McAllister said on Monday.
"We're not aware of that and to be fair senator, that would be a matter for Snowy Hydro," senior official David Fredericks replied.