The energy firm laid out two options in its New South Wales generation plan: either replace the generation in stages by the coal plant's 2022 retirement date, or upgrade the plant to extend its operational lifetime.
In the review, AGL found replacing the generation with gas-peakers, 1.6GW of renewables, an upgrade of another coal plant and up to 150MW of demand response and 250MW of storage, would need an investment of A$1.36 billion ($1 billion).
This would replace the generation for 15-30 years at a levelised cost of energy of A$83/MWh ($62.30/MWh).
In comparison, an upgrade to the Liddell plant, extending its operational life by just five years to 2027 would cost roughly A$920 million ($690 million) in investment, and have an levelised cost of energy of A$106/MWh ($79.5/MWh).
AGL expects to add 653MW of new wind power by 2019, comprising the 200MW Silverton and 453MW Coopers Gap projects. It has also agreed to buy a further 300MW of solar power in New South Wales, with the project delivery expected between 2020 and 2022.
The firm then plans to build a further 750MW of renewables from 2020, as well as adding battery storage and demand response to its portfolio.
"This plan demonstrates that old power plants can be replaced with a mixture of new, cleaner technology, while improving reliability and affordability," said AGL chairman Graeme Hunt.
AGL said the decision to pursue the replacement portfolio is in line with Australia's new National Energy Guarantee policy, unveiled in October by prime minister Malcolm Turnbull.
Craig Kelly, chairman of the government's backbench committee on the environment and energy and an MP for the Liberal party, which is the largest in the coalition government, said the decision by AGL would see a "significant reduction of base-load power" and leave the state "more at risk to blackouts", according to the Guardian Australia newspaper.
AGL's proposed portfolio to replace Liddell is set to shrink its carbon footprint by 17.6%, the firm claimed.
In August, AGL awarded GE Renewable Energy the engineering, procurement and construction contract for the Coopers Gap project, located 250km north-west of Brisbane.
The site will comprise 91 3.6MW turbines with 137-metre rotors and 32 3.8MW turbines with 140-metre rotors.