The federal government will provide $1.5 billion in energy bill relief that will be paid for by state and territory governments, and will start in the second quarter of 2023.
It was part of a suite of measures agreed to by Prime Minister Anthony Albanese and state and territory leaders at a virtual national cabinet meeting on Friday to reduce energy prices.
Gas prices will be capped for one year at $12 a gigajoule, with gas retailers subject to a mandatory code of conduct.
The consumer watchdog will also be given new powers to enforce and monitor the new code.
Federal parliament will be recalled next week in order to pass the changes.
Coal prices will also be capped a $125 a tonne.
Modelling by the government has shown the average household would be $230 worse off for their power bills if the coal and gas price caps weren't carried out.
Gas prices were expected to rise by 20 per cent in both this financial year and the next.
However, modelling has shown the intervention will limit the rise to 18 per cent this financial year and four per cent the year after.
The modelling has also shown expected electricity price rises of 36 per cent during 2023/24 will instead be 23 per cent during that time.
Prime Minister Anthony Albanese said the bill relief would not be direct cash handouts, to protect inflation levels.
"It will not be the same plan in each state and territory, given each of them have different systems," he said.
"That is part of the complexity of what we have been dealing with is the fact that we have eight different systems around the country."
Opposition Leader Peter Dutton said the agreement reached at national cabinet was a sign the government had broken promises on energy bill relief.
He said there had been no experience globally of success in capping energy prices.
"This is a very difficult situation for families and for small businesses to see a government that has no idea as to what they're doing," he said.
The plan has been welcomed by business groups, but Minerals Council of Australia chief executive Tania Constable said the deal only created further uncertainty for the sector.
"You don't fix the system by making it more complex. The solution is more supply, not more regulation," she said.
The Australian Petroleum Production & Exploration Association has criticised the lack of consultation on the proposal, with its chief executive Samantha McCulloch saying the gas cap would force up prices for households.
"Less gas will ultimately mean higher prices while threatening Australia's energy security, our emissions reductions goals and the enormous economic benefits that the industry delivers for Australians," she said.
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