The Federal Government is working on a “capacity mechanism” to ensure stability in the national electricity grid, paying coal and gas generators for reliable supplies.

Currently, generators in the National Electricity Market (NEM) are paid only for the electricity they produce.

But the federal Energy Security Board (ESB) is working on a new mechanism that would pay generators for the capacity they can provide. 

The new system, to be run through an auction process, would also pay for generators to be available when needed.

The ESB says it intends to introduce such a tool by mid-2025, and that it will be vital to ensuring more capacity enters the grid in coming decades.

Some have called for the new mechanism to exclude existing generators, particularly coal and gas. 

However, the ESB argues that the mechanism must be able to access a mix of technologies, and discourage the early exit of existing generators before new generators - including new renewable sources - are ready to take their place.

It would also give states and territories the final say on which generators were eligible for the payments in their jurisdiction.

The ESB says it could actually see net zero energy emissions achieved earlier than anticipated.

“Designed well, the capacity mechanism will enable a swifter, less risky and more orderly transition to a net zero emissions energy system,” it said.

It expects significant demand for more power to enter the national grid in the coming decades, and wants to create the stability and certainty needed to encourage new investment.

The plans have raised concerns that the cost of paying generators to provide capacity will be passed onto consumers, forcing up power prices.

But the ESB says that outcome could be avoided.

“From a customer point of view, the risks of a disorderly transition would be reduced, including avoiding elevated high prices due to scarcity and the disruption and costs of load shedding,” it said.

“The ESB is aware of concerns that a capacity mechanism could cause customers to pay more for the same level of service.

“This is clearly not the intent, and it will be avoided through careful design.”

Energy Minister Chris Bowen says it is a positive step forward.

“The Energy Security Board's release of this consultation paper is welcome,” Mr Bowen said.

“It follows agreement by all energy ministers earlier this month that the ESB should undertake this next step in energy market reform.

“While there is still a ways to go, it will allow market participants and experts to express their views, and puts us back on track in reforming an energy market that has undergone rapid change, but was neglected by the Commonwealth in recent years.”

Greens leader Adam Bandt says his party would not support any scheme that allows coal and gas-fired generators to run longer.

“Paying them to stay in the system longer is only going to prolong the problems, and also prolong the transition to renewables,” Mr Bandt said.

“The idea of paying coal and gas to stay in the system isn't just going to make the climate crisis worse, it's going to reward the big corporations who have been holding us to ransom.”