Electric bus, train and light rail services in New South Wales will run on fully renewable energy from next year under a new $1.9bn deal, the state government says.

The Minns government on Friday announced it had signed a contract with Snowy Energy to bring all public transport operations in the state under a single renewable energy agreement for the first time. The seven-year deal comes into effect from July 2027 and will last until 2034.

The NSW minister for transport, John Graham, said it would reduce costs at a time when fuel uncertainty was seeing more Australians cut back on driving in favour of public transport.

“Cost of living pressures are real for household and government budgets,” he said.

“This contract reduces costs and moves us towards better environmental outcomes while we deliver a reliable public transport network.”

The NSW government, which has rejected calls to follow other states by making public transport free during the fuel crisis, said savings of $130m on transport power bills would be reinvested into services.

It said Snowy Energy, the retail brand of the commonwealth-owed Snowy Hydro, was awarded the contract after a competitive two-year process. Prior to the deal, Transport for NSW was already Snowy Energy’s largest customer, contributing more than 10% of its energy sales.

The Snowy Hydro CEO, Dennis Barnes, said the deal would see public transport’s consumption of energy matched to wind, solar and hydroelectric generators in its network through the issue renewable energy “certificates”.

“What this deal does is match the consumption of [Transport for NSW] to the production of renewable energy somewhere, but it isn’t a physical connection. It’s a financially traceable connection through certificates.”

He said in the future this would include assets such as the Snowy Uungala wind farm, under construction near Dubbo. Snowy Hydro operates three gas-fired power stations, with fossil fuels contributing 5%-10% of the power it generates annually.

The state government has said the deal will lead to “significant emissions reductions”, avoiding the equivalent of more than 800,000 tonnes of CO2 annually compared with conventional power.

Transport for NSW, which uses almost as much power as all other NSW public agencies combined, has a target to reduce operational emissions by 65% by 2030 and reaching net zero by 2035.

Fossil fuels are still used on most of the state’s public buses, as well as on diesel-powered ferries and intercity and regional trains.

The new regional rail fleet, which is bimodal and runs on diesel and electricity, due to replace diesel-powered XPT trains, is several years late. The state government has said electric ferries will fully replace diesel-powered vessels by 2035.

The government has ordered more than 500 electric buses, of which hundreds are already in operation, with 7,500 more expected to fully replace the 8,000-strong fleet of diesel-powered vehicles.

Last month, the NSW Anti-Slavery Commissioner found Transport for NSW had not taken reasonable steps to engage with groups affected by the potential use of forced labor in Xinjiang in China and the Democratic Republic of Congo in the supply chains for lithium-ion batteries.