Specialist crews are at the plant in the city's south after a major hazardous materials incident was declared by Fire and Rescue NSW.
The precautionary evacuation order is for all residents, workers and drivers within 800 metres of fire site in the Bayside area, between Hillsdale and Banksmeadow.
The blaze broke out at the plant just after 6am on Tuesday, with arriving crews spotting flames 50 metres above a 70-metre tall exhaust stack.
Staff had shut down the plant and were carrying out a controlled burn inside the stack to halt the flow of gas, Fire and Rescue NSW said.
However, further alarm was raised later in the day when crews were called back to the tower over concerns one of the cooling towers had suffered structural damage, and was at risk of collapse.
"There are now concerns the tower may collapse and, if it does, land on a supply of highly flammable hydrogen, being stored on semitrailers on an adjacent property," Fire and Rescue said in a statement.
Plans are under way to remove the cylinders containing the hydrogen.
Significant resources have been sent to the scene including local firefighters, HAZMAT crews, the Environmental Protection Authority, Safework NSW, NSW Police, paramedics and experts in structural collapse.
Drones are also being used to monitor the structural integrity of the tower.
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