Prime minister Scott Morrison stressed the importance of "affordable, reliable energy" and said if capacity were not replaced before AGL shut down its Liddell coal power station wholesale prices would jump by 30%.
"We intend to do something about it. While the private sector has announced projects, which could fill this gap, it has committed to very few," Morrison said at a press conference on Tuesday.
The Liddell coal-fired power station will be closed by April 2023.
Morrison claimed that in order for projects to fill the void left from the closure of Liddell, projects would need final investment decisions by the end of April 2021.
"Now that's less than eight months - and we're counting. Each day," he said.
Morrison then outlined what will be the biggest overhaul of Australia's energy sector in recent history, committing millions to upstream gas infrastructure projects and plans to change the Australian Domestic Gas Security Mechanism. The total government investment in new gas totals an initial A$52.9 million.
As part of its big shake-up of the energy sector, the federal government has committed to develop a gas-fired power station to replace Liddell in the event that private investment in new projects were not made.
It is an extraordinary intervention by the federal government, one that has shaken the downstream industry to its core.
"If the energy companies choose to step up and make these investments to create that capacity, great, we will step back. If not, my Government will step up and we will fill the gap," Morrison said in a pre-budget speech.
The government's plans would see pumped-hydro developer Snowy Hydro build a giant gas plant in the Hunter Valley of New South Wales.
Following Morrison's major announcement, the peak body for the downstream energy industry, the Australian Energy Council warned that federal intervention would risk private investment, not encourage it.
The AEC represents 22 of Australia's major investors and generators in the energy industry.
Australian Energy Council chief executive Sarah McNamara
The AEC's chief executive Sarah McNamara went so far as to say the approach taken by Morrison would "deter the very investments the government is attempting to encourage."
She blamed the long-standing lack of a federal energy policy as the reason final investments were taking so long and said the government would be better spent using its time to create a comprehensive energy policy.
"The sector is struggling to make final investment decisions in an environment of ongoing policy uncertainty," McNamara said following Morrison's announcement.
"For more than a decade we have been warning of the dampening effect State and Federal Government interventions have on investor confidence."
Over the last decade Australia has seen five prime ministers come and go. Each had a different approach to energy policy, and none has been able to introduce and keep an energy policy in place as divisions between parties shot down any form of stability.
The last was former PM Malcolm Turnbull's National Energy Guarantee, which ultimately ended his prime ministership, at least according to political spectators.
McNamara said a line needed to be drawn in the sand between energy investment and planning, and that independence was needed to ensure competitive access to gas.
"[Future capacity should follow] Australian Energy Market Operator advice, followed by private investment in infrastructure that is not underwritten by government," McNamara said.
This sentiment is shared by the upstream oil and gas peak body. Just last September the Australian Petroleum Production Exploration Association, said the government needed to "resist calls" for policy interventions that "force non-commercial outcomes."
"Some existing gas market regulatory frameworks are inconsistent with and will compound current challenging market conditions," APPEA said in a report titled Powering Australia's Recovery in September.
APPEA urged the government to maintain access to open and competitive markets and ensure ongoing growth and investment in the upstream sector instead.
The member of the AEC at the heart of the discussion is AGL Energy, led by CEO Brett Redman.
Former chief Andy Vesey first announced the planned closure of the Liddell power station in 2015.
It was at the insistence of the federal government in 2017 that AGL agreed to keep the ageing station open until 2023.
Redman told Energy News in a statement today that the company was still staying the course on closing the power station within the next three years.
"As we've said previously, the first Liddell unit will be retired on April 1, 2022 and the remaining three units will be retired in April 2023," Redman said.
"With today's announcement we will continue our closure and transition plans for Liddell with certainty, while at the same time progressing our investments in projects that transition our energy portfolio, with a focus on dispatchable and firming technology that deliver on our customers' needs."
Redman refused to be drawn when questioned as to whether he agreed with the AEC's position that investment needed to come from the private sector and not the public purse.
He did however note that AGL was a leader in new generation development by building the only new gas generation on the east coast in the last seven years at Barker Inlet.
"We've made good progress on this proposed development at Newcastle… and a final investment decision [is] expected by early 2021," Redman said.
Just last month AGL also committed to an 850MW battery storage project across to ensure supply to the eastern states by 2024.
The lobby group which AGL is a key member of today said these investments was the proof in the pudding that the government's dire predictions of a 1000MW shortfall were untrue.
"The Australian Energy Market Operator's most recent assessment identified a potential shortfall in NSW of only 154MW," AEC chief McNamara said.
Meanwhile the NSW state government has announced it will develop three renewable energy zones, specifically designed to fill the energy gap left behind by shuttering coal fired power stations.