Mr Taylor is aiming to present the plan to national cabinet in October, with more detailed design to follow in the coming year.
NSW, Victoria and other states and territories have committed to reach net zero emissions by 2050 and are investing taxpayer funds to support the rollout of more solar and wind farms.
While state energy ministers have agreed to the creation of a capacity market and are contributing to further design work, they are wary of controversy over fossil fuels.
A spokesperson for Victorian Energy, Environment and Climate Change Minister Lily D’Ambrosio said there was as yet “no agreement on a specific model, including whether coal should be eligible for payments”.
“In assessing any model, Victoria will be guided by the need for a well-managed transition that aligns with our strong emissions reduction targets, as outlined in our climate change strategy released earlier this year.”
NSW Energy and Environment Minister Matt Kean said there was a need to encourage dispatchable investment because “what we don’t have is a mechanism to ensure existing stuff keeps going as long as we need it” and added “we’ve got a lot of work to do” before the design is finalised.
Renewables investors and some market analysts claim a capacity market could be designed to focus payments only to coal and gas plants.
“The case for such a profound change has not been made,” said Clean Energy Council chief executive Kane Thornton, who warned a capacity market could distort the market and discourage investment in renewables.
Big business groups have reserved judgment. Australian Industry Group chief executive Innes Willox said the proposal was “impossible to evaluate given its vagueness”.
“It could be a huge change to the [National Electricity Market], or a modest tweak. It could be palliative care for fading coal generators, or the foundation of investment in new clean dispatchable resources,” Mr Willox said.
Grattan Institute energy program director Tony Wood said a capacity market was the best mechanism to incentivise private investment in dispatchable power, but governments should leave the politics aside and refrain from making more public investments in energy projects.
“The really important thing, if the ministers support the ESB to do more work in designing a capacity mechanism, is for them to step back and let the market work,” he said.