A coil system in Sydney's Mason Park switching station erupted into flames about 2.15am on Friday morning for reasons as yet unknown.
Early images showed the flames reaching into the night sky, but by 7.30am it is understood the fire had begun to smoulder.
The danger of the burning equipment kept firefighters sidelined, an AusGrid spokeswoman said.
"Due to the nature of the high-voltage electrical equipment involved, and in consultation with emergency services, we have let the fire burn out under controlled conditions," she said.
"The cause of the incident is not yet known and will be investigated once it is safe to access the site."
The distribution provider said the fire was not impacting customer electricity supply.
The 132 kilovolt station is located about 11km from Sydney's city centre.
One nearby resident said firefighters would have had to shut down the switching station to extinguish the blaze.
"The firefighters are saying that they can't put it out because they've got to turn off a substation and would take out hundreds of thousands of houses," John told Sydney radio station 2GB.
Ausgrid is the largest electricity distributor on Australia's east coast with about 1.8 million customers relying on its infrastructure.
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