Consumers will have to pay for generators to be kept on stand-by to fill shortfalls in electricity during summer peaks or face the prospect of blackouts.
A special report from the Australian Energy Market Operator to the Turnbull government warns Australia will need an extra 1000 megawatts of electricity ready to dispatch during the coming summer.
AEMO is already working on securing that power, which has to come from sources outside the national electricity market such as businesses' back-up diesel generators.
If the necessary power can't be found, South Australians and Victorians face the risk of four-hour blackouts over summer, warned a companion AEMO report.
Next year, the market operator will set up strategic reserves of the power it forecasts will be needed to cover future summer spikes.
At the moment, payments to generators to be on stand-by during peak usage, whether they end up being used or not, is recovered from consumers, and it's envisaged this would be the case with the new strategic reserves too.
Customers have told AEMO they would be willing to pay between $25 million and $50 million a year to avoid load shedding, or being forced to cut their power use.
But this strategic reserve is meant to be a short-term solution until another mechanism is established, such as the clean energy target recommended by Chief Scientist Alan Finkel, to encourage investment in new generation.
AEMO also warns an extra 1000MW needs to be added to the market over the next five years to cope with the expected 2022 closure of Australia's oldest coal-fired power plant, Liddell in the NSW Hunter Valley.
But it says existing policies don't provide incentives or price signals to attract investment in the new flexible power plants needed to keep the network reliable.
Given the time it takes to build new power stations, AEMO gives preference to keeping existing generators open rather than constructing new ones.
It suggests the government consider how to extend the life of older generators or encourage investment in new technology so they can ramp up generation more quickly to respond to spikes in demand.
"Time is of the essence to obtain the appropriate level of resources to support overall system reliability," AEMO states.
The government has already started talking to Liddell's owner, AGL, about keeping it at least five years beyond 2022, although the company has committed to getting out of coal entirely.
It's understood the government also believes the gas-fired power stations at Swanbank in Queensland, Tasmania's Tamar Valley and Pelican Point in South Australia have spare capacity that could be ramped up to meet future needs.
Energy Minister Josh Frydenberg says the AEMO report reinforces moves to require power stations to give three years' notice of their intention to close, and to require wind and solar plants to have their own storage.
"Building on our actions to date - including putting in place new restrictions on the export of gas and opening up discussions with AGL over Liddell - the Turnbull government will leave no stone unturned to ensure affordable and reliable power for all Australians," he said.