A draft plan for a new "capacity mechanism", aimed at ensuring stability in the national electricity grid, could see coal and gas generators paid for reliable power supply.

The federal government's Energy Security Board (ESB) has been tasked with designing the new mechanism, which would pay generators through an auction process for the capacity they can provide.

Currently, generators in the national electricity market — which serves the east coast and South Australia — are only paid for the electricity they produce.

The new system would also pay for generators to be available when needed.

The ESB said introducing such a tool by mid-2025 was going to be vital to ensuring much more capacity enters the grid in coming decades, and a smooth transition to net zero emissions by 2050.

There have been calls for the new mechanism to exclude existing generators, particularly coal and gas. 

But the board argued it was important that the mechanism could access a mix of technologies, and discourage the early exit of existing generators before new generators — like more renewables — were ready to take their place.

States and territories would still be given the final say on which generators were eligible for the payments in their jurisdiction.

The Victorian government had previously insisted states be given the right to determine which technologies were supported, arguing incentives should only be directed toward zero-emissions technology.

Victorian Energy Minister Lily D'Ambrosio said the ESB's plan provided the flexibility they wanted to see.

"We have always been clear that a capacity market operating in Victoria would make payments to zero-emissions technologies and not fossil fuels," Ms D'Ambrosio said.

The board's draft plan said the mechanism could actually see net zero emissions in energy 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.

Prime Minister Anthony Albanese said the proposal appeared sensible.

"It's an insurance scheme into the energy system," he said.

"And that seems to me to be a bit of common sense."

Enormous demand for more power in decades ahead

The board warned there was going to be significant demand for more power to enter the national grid in the coming decades, meaning stability and certainty will be vital to encouraging new investment.

It warned that many coal generators were reaching the end of their useful lives, while electricity demand was expected to more than double over the next 30 or so years.

Forecasting ahead to 2050, it said the grid would require the equivalent of 50 new Snowy Hydro schemes to enter the market.

It also addressed concerns the cost of paying generators to provide capacity would be passed onto consumers, and force up power prices.

The ESB said 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.

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

The current draft is now open for public comment, and a detailed plan will be put to energy ministers at the end of the year.

Energy Minister Chris Bowen said the board's proposal was 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."

Energy Minister Chris Bowen said the ESB's proposal struck the right balance between preparing for more renewables to enter the system and protecting reliability.

"We will develop a capacity mechanism which works for the task at hand," he said.

"Which is to ensure reliability as we undertake this massive transformation in our energy grid, to being much more renewably focused.

"To being focused on achieving our climate ambitions, but also achieving so in a way which does in no sense undermine reliability for Australians."

But Greens leader Adam Bandt said any scheme that served to keep coal and gas-fired generators running longer could not be supported.

"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.