Australians could face higher power bills and more blackouts this summer because of deep-seated problems in the national electricity market, the energy regulator has warned.

Key points: AEMO says electricity market struggling to provide reliable supply as grid loses "dispatchable" power

AEMO says electricity market struggling to provide reliable supply as grid loses "dispatchable" power Renewables cannot provide reliable power at all times without storage, report says

Renewables cannot provide reliable power at all times without storage, report says AEMO is struggling to establish reserve of 1,000 megawatts but says it may not be enough

The Australian Energy Market Operator (AEMO)'s long-awaited report into the grid comes as the Coalition tries to hammer out a new energy policy.

The agency said the electricity market was struggling to provide a reliable supply as coal-fired power stations shut down and the grid loses "dispatchable" power which can be deployed at any time.

"We face an increasing and unacceptable risk that there will be insufficient capability in the system," the report said.

"In turn, this exposes consumers to a heightened risk of involuntary and unacceptable load shedding."

What is load shedding? Load shedding happens when the AEMO directs power companies within Australia to start switching off customers' power supply because the power system is at risk

Load shedding happens when the AEMO directs power companies within Australia to start switching off customers' power supply because the power system is at risk The system always has to remain in balance between supply and demand — if there is no extra supply available, the authorities have no choice but to reduce demand by shutting customers off

The system always has to remain in balance between supply and demand — if there is no extra supply available, the authorities have no choice but to reduce demand by shutting customers off If they don't, the entire system can fail, causing a statewide blackout like what happened in South Australia in September 2016

AEMO is already scrambling to establish a "strategic reserve" of 1,000 megawatts designed to prevent more power shortfalls this summer.

It will do this by paying businesses with diesel generators — as well as gas power plants with spare capacity — to be on standby to pump extra power into the system when it is struggling.

But it has conceded that may not be enough to prevent blackouts in coming months if there are widespread heatwaves or other problems.

The regulator said it will need to maintain the strategic reserve until at least 2021 in order to prevent disruptions to supply.

But the problem is likely to become much worse in 2022 when the Hunter Valley's Liddell Power Station — Australia's third largest — shuts down.

AEMO's report estimates the grid will then need another 1,000 megawatts of supply to meet the shortfall.

It suggests the Federal Government could upgrade or extend the life of some coal-fired plants in order to help the market make the transition to new sources of energy.

Prime Minister Malcolm Turnbull has been in discussions with the power company AGL, which owns Liddell, to keep the station open for another five years or have it sell to a "responsible party".

Sorry, this video has expired Prime Minister announces Federal Government trying to delay Liddell closure

Report 'confirms' Government's concerns about coal plant closures

The report from AEMO said investment in renewable energy had been increasing, providing more low-cost energy to the grid.

But it said renewables cannot provide reliable power at all times without storage, which means "the system has become more variable and economically challenging for traditional supply".

It also makes it clear there is a pressing need for policy that encourages investment, saying "the current market design is unlikely to … incentivise the development of new flexible dispatchable resources at the level required".

Chief scientist Alan Finkel has laid out a blueprint for energy policy which recommends the Coalition embrace a Clean Energy Target to encourage more investment in new generation.

Sorry, this video has expired What is a clean energy target? How will it work and why is it necessary?

But the Government has not yet endorsed that policy, and some Coalition MPs remain hostile towards it.

They have been pushing the Government to consider building new coal-fired power stations to guarantee affordable energy supplies.

AEMO is sceptical about that idea — noting that new power plants would still face "uncertain long term viability" and are unlikely to be built quickly enough to deal with the immediate problems facing the grid.

Energy Minister Josh Frydenberg argued the regulator's report buttressed the Coalition's argument about the limits of renewable energy.

"This report does confirm our concerns about the impact that the accelerated closure of coal-fired power stations has on both the price of electricity and also the reliability of our system," he said.

"Not all electrons are created equal — coal, gas and hydro create generation which can be created 24/7 while wind and solar power without the necessary backup can only provide power some of the time."

But Mr Frydenberg would not be drawn on whether the Coalition would adopt the Clean Energy Target.

"We certainly recognise we need to integrate climate and energy policy to ensure there's sufficient investment," he said.