More than a million Victorian households are at risk of being without power this summer during extreme heat if coal and gas plants are not returned to service in time for peak periods, the energy market operator has warned.

Key points: AEMO report warns Australia's ageing coal fleet is putting power reliability at risk

AEMO report warns Australia's ageing coal fleet is putting power reliability at risk It says up to 1.3 million Victorian households could lose power if no additional supply is secured

It says up to 1.3 million Victorian households could lose power if no additional supply is secured The Federal Energy Minister has slammed Victoria for making the market vulnerable

The forecast also predicts up to 770,000 NSW homes will face a blackout risk on a day of extreme heat once the Liddell power plant has closed in 2023-24 if contingencies are not made.

The Victorian worst-case scenario is in the Australian Energy Market Operator (AEMO) forecast of supply, released Thursday, that will reignite the political debate over power generation.

The report warns that power reliability will continue to decrease in the next decade "due to an uncontrollable, but increasingly likely, high-impact" event in Australia's "ageing coal fleet".

AEMO said Australia needs targeted investment in dispatchable power to meet the expected shortfall during peak demand as older coal plants, such as Liddell, close in the coming decade.

Dispatchable power includes coal, gas, battery and pumped hydro.

The Snowy Hydro 2.0 will improve reliability for the entire network once operational, which is expected in 2025.

Victoria at highest risk of blackouts

In January, the equivalent of 375,000 households were without power for an hour in Victoria and South Australia due to extreme temperatures and three coal units in the Latrobe Valley being out of action.

The closure of Hazelwood in the Latrobe Valley removed a large source of dispatchable energy but there has been a growth in solar and wind power.

This summer, Victoria is at the highest risk of blackouts, particularly if two power stations — AGL's Loy Yang A2 (500MW) in Gippsland and Origin's gas plant in Mortlake (259MW) — are not returned to service after earlier faults this year.

Both are due to be back online by the end of December.

AEMO found that because of extended outages and "the continued deterioration of the reliability of ageing brown coal units", energy reliability in Victoria would get worse.

The state needs between 125MW and 560MW of extra supply to improve reliability on extreme days. AEMO is already looking at ways to do this, including additional generation and asking industry to reduce usage.

"If both power station outages were extended over the summer, and if no additional supply was secured, involuntary load shedding may be experienced in Victoria during extreme weather events, potentially over multiple events, equivalent to between 260,000 and 1.3 million households being without power for four hours," the report warns.

NSW under pressure from Liddell closure

AEMO chief executive Audrey Zibelman said the continued use of back-up generation was unsustainable.

"We are finding this type of reactive action is imposing higher costs on consumers and risks to reliability which are not sustainable over the longer term," she said.

Longer term, NSW's energy reliability will decrease as Liddell gradually closes, if no alternative is built in the interim.

By 2023-24, NSW faces a similar situation to the one Victoria will confront this summer due to increased demand on hot days and unexpected outages at ageing power plants.

Ms Zibelman called for urgent action and investment in the sector to deliver affordable and reliable electricity supply.

"A more measured course is to take a number of deliberate actions that address the challenges of our ageing coal fleet and which meet the need for secure and dispatchable supply, whilst also taking advantage of Australia's natural resources," she said.

"We need to harness all the resources we have in the system, together with the opportunities that come with the technological advances occurring in the industry to meet current and future energy demands at the lowest cost possible."

Minister slams Victorian Government

Federal Minister for Energy Angus Taylor said the Victorian State Government had created unnecessary risk to the affordability and reliability of the national energy market.

Energy Minister Angus Taylor says Victorians need to feel confident that the lights will stay on. ( ABC News: Luke Stephenson )

"In 2018, Victoria barely met the standard and 200,000 customers lost their power," he said.

"When Victorians flick the switch, they need to be confident the lights will turn on — and stay on."

But his Victorian counterpart, Lily D'Ambrosio, said it was the continued failure of old coal plants that was making the supply vulnerable.

"The biggest threat to reliable energy supply in coming years is the complete lack of a national energy policy," she said.

"Angus Taylor needs to look at the facts staring him in the face.

"Victoria's investment in renewable energy will significantly improve our energy supply and reliability in the coming years — which is why it's so important we continue driving investment in this vital industry."