Households and businesses who turn down air conditioners during heatwaves and switch off other appliances like pool pumps would be rewarded under a scheme announced today.

Electricity users in Victoria, South Australia and New South Wales will be able to volunteer to cut their power use when demand is high in exchange for benefits like rebates on their bills.

Energy and Environment Minister Josh Frydenberg said a household could be paid $25 each time it switched off at a peak demand time, on top of the saving on its power bills.

But other rewards might include giving people a free day of electricity or a movie voucher. The incentive would depend on the various companies participating in the trial.

The Federal Government is spending nearly $30 million to support the trial and the NSW Government is contributing $7 million.

Audrey Zibelman, the head of the energy market operator, said it was aimed at managing demand, not "making people sweat in their homes".

She said it would make the system flexible enough to cope if supply fell temporarily, such as if the wind dropped and less wind energy was generated.

Businesses that sign up for the scheme would install monitoring devices to reduce power use on equipment like cool rooms when heatwaves drive extreme power demand.

Mr Frydenberg said the pilot program could save enough power to support more than 100,000 homes — or as much as is generated by a small power station.

He said the system was already used in nations including the United States and New Zealand as a cost-effective way of managing power demand and price spikes as well as preventing outages.

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The scheme is part of a broader switch to managing demand by using smart meters in households as well as making it easy for people to track their power usage online and take advantage of off-peak prices.

NSW Energy Minister Don Harwin compared the plan to the way people learned to reduce their water use during the last major drought.

"It is not about turning the lights off or making people uncomfortable, it is actually just getting smarter about using [electricity], just like we got smarter about using water, and therefore making it efficient and cheaper," Ms Zibelman said.

She said it would make the power system more reliable by having the ability to say "it's going to be hot, the system is stressed — can we use energy a little better?" in a way that customers "don't even notice".

A similar program called PeakSmart already operates in Queensland, offering financial incentives for people who agree to limit air-conditioners to 26 degrees Celsius and have pool pumps turned off during peak demand.