Steam will cost the Otago District Health Board $700,000 more than expected in the next year.
The budget blowout is because the cost of coal more than doubled following the closure of the Ohai coal mine.
Steam is produced at an "energy centre", which is a partnership including the board, the University of Otago, Cadbury and laundry service providers.
The board uses about 48,000 tonnes of steam a year, mainly for heating and for sterilising units.
When the Ohai mine closed in June the energy centre had to find an equivalent coal that met its current resource consent, chief financial officer Robert Mackway-Jones said in a report to go to the board tomorrow.
To burn a lower-grade coal the energy centre would need more capital investment and resource consent variations.
However, if the energy centre was upgraded, work would have to be done during the summer, when there was lower demand for steam.
An upgrade was expected to reduce costs significantly, although they would still be about 30% higher than before the mine closure.
Mr Mackway-Jones said he could not give any further details about costs because of commercial sensitivity.