The combination of retiring coal plants and the addition of new renewable capacity means the Australian grid has less reserve capacity available, increasing the chances of supply interruption and load shedding, according to AEMO's Electricity Statement of Opportunities (ESOO) report.
In a letter to Australia's environment and energy minister Josh Frydenburg, AEMO chief executive Audrey Zibelman said: "While AEMO anticipates sufficient capability to meet customer demand during most hours of the year, the overall responsiveness and resilience of the system is at risk from increased vulnerability to climatic events.
"AEMO's view is that optimal approaches towards ensuring an efficient balanced system must target mechanisms that allow the greatest practical level of competition and innovation."
It its short-term recommendations, AEMO said the federal government should target 1GW of strategic reserves in the states of Victoria and South Australia — the states most at risk.
Clean Enegry Council CEO Kane Thornton said the shortfall in generation was due to the "policy vacuum" caused by the "decade-long political debate" that plagued Australia's energy market until this year.
"The AEMO report yesterday revealed that the new projects added to the system under the renewable energy target will help to improve reliability over the next few years," Thornton said.
"More than A$8 billion (US$6.4 billion) of new clean energy projects are underway in 2017, creating thousands of jobs and building critical infrastructure to keep the lights on and reduce power prices over the next few years.
"Last summer's heatwaves highlighted the contribution of renewable energy, which essentially saved New South Wales from a blackout when some thermal gas and coal generators went missing in action on 10 February this year.
"We need to accept that the energy system is in transition, and long-term policy is now essential to ensure private investment in the most efficient new energy technology and solutions," Thornton added.
