CANBERRA, AAP – Coal and gas power plants could receive payments to stay alive in a bid to avoid surging energy prices under a national plan to reform Australia’s electricity market.

The Energy Security Board has provided final advice to federal and state ministers about the future of the energy market after 2025.

As part of its recommendations, incentives would be provided to retain existing power generation for as long as it is needed to keep the system reliable and affordable.

The “capacity mechanism” would be designed to keep the power grid reliable while the system transitions to renewable energy.

It would increase the proportion of wind and solar power over time, alongside battery and pumped hydro investment, to ensure an orderly move away from coal.

But renewable energy investors warn paying fossil fuel generators to stay in business could have a chilling effect on new supply.

An open letter signed by the Australia Institute wanted support for battery storage and pumped hydro instead of giving “financial windfalls to old, inflexible and polluting generators”.

The ESB has promised to work with industry players and governments about how the mechanism would look.

It also highlights a reform path to better integrate distributed energy resources like rooftop solar.

“There are a number of policy choices in the design of a capacity mechanism, as set out in this advice, which need to be considered to ensure the recommended design is both effective and efficient,” the report said.

“Beyond 2025, the types of resources that are expected to be best incentivised by a certificate scheme are those resources that are flexible, reliable and economically competitive when operating at low-capacity factors.”

Federal Energy Minister Angus Taylor said keeping dispatchable generators from shutting down too early would avoid price spikes.

“Taking action now is critical and we need a coordinated approach to market design to keep the lights on and costs down,” he said.

Mr Taylor added that would avoid price rises similar to when Victoria’s Hazelwood coal-fired power station closed in 2017.

While there was record investment in renewable capacity with 7000 megawatts added last year, the minister said there was still not enough capacity to ensure a reliable and affordable grid.

“This is a significant concern, with large-scale replacement of thermal generators needed over the next decade and beyond as older power stations leave the market,” he said.

Energy ministers will meet in September to agree the final package of reforms which will be provided to national cabinet in October.