The Australian energy sector is grappling with many of the same challenges New Zealand faces. MinterEllisonRuddWatts energy sector group co-leads Partner Scott Thompson and Senior Associate Natasha Hood have recently returned from the Australian Clean Energy Summit in Sydney. While there, Scott and Natasha took the opportunity to catch up with our MinterEllison colleagues and Australian based clients. One hot topic in Australian energy circles right now is the review of the National Electricity Market (NEM).

Review of the NEM

The NEM Wholesale Market Settings Review Panel (colloquially known as the Nelson Review after its chair Dr Tim Nelson) released its draft report on 6 August for consultation. 

The NEM is the wholesale electricity market serving Victoria, New South Wales, the Australian Capital Territory, Queensland, South Australia and Tasmania. Like New Zealand’s electricity market, the NEM is an energy only market (EOM) and it’s facing mounting pressures as it becomes more weather dependent, more energy constrained, less scheduled and less dispatchable (due to increasing distributed energy resources). The Nelson Review’s remit was to recommend wholesale market settings to promote investment in firmed, renewable generation and storage capacity following the conclusion of Australia’s Capacity Investment Scheme (CIS) [1] tenders in 2027. The draft report was informed by extensive consultation, including discussions with a wide range of market participants in New Zealand.

Key recommendations

The draft report does not recommend throwing the baby out with the bathwater, but rather retaining the energy only spot market with reforms to reinforce the NEM’s effectiveness. The proposed reforms aim to better connect spot market outcomes, derivative contract markets and long-term investment signals to unlock broader consumer benefits. The nine recommendations from the Panel are designed to achieve three key outcomes.

1. Ensure effective operation of the spot market. For example, the draft report recommends measures to enhance the visibility and dispatching of “hidden participants” (i.e., unscheduled consumer energy resources such as rooftop solar, battery storage, electric vehicles and flexible demand). This will in turn improve forecasting and efficiency. 

2. Maintain liquidity in the derivatives market to increase investor confidence and improve retail competition. The draft report recommends the establishment of a permanent/always on energy derivatives market making obligation (MMO) [2]. The MMO will apply to all participants above a pre-defined size, with prescribed volumes that must be made available for trading and a limit on the bid-ask spread. The MMO will be designed to facilitate trade in new standardised financial contracts, which will:

   1. be co-designed by the regulator and industry [3]; and 

   2. better address the needs of buyers and sellers as the system shifts from centralised thermal units to firmed variable renewable energy. 

3. Unlock long-term investment in new energy services. The key reform proposed by the draft report is the creation of a new, permanent and legislated feature of the market called the Electricity Services Entry Mechanism (ESEM). The ESEM is designed to address two structural barriers to new investment in electricity infrastructure:

   1. The “tenor gap” (i.e., the mismatch between the intention of buyers and sellers in relation to the length of a contract – sellers need terms of 10-30 years to finance capital-intensive assets whereas buyers typically want to contract for three to seven years); and
   2. Uncertainties driven by policies to achieve entry of new generation capacity before exit of legacy plants.

The proposed ESEM – a hybrid approach of both decentralised and centralised procurement - would involve a central buyer issuing offtake contracts under a reverse auction process [4] for bulk zero emissions energy, shaping and firming. The ESEM would only issue contracts for the later years of a project’s life (i.e., for the period a project is not able to secure them in-market). The ESEM, described as effectively a “warehouse”, would hold the contracts temporarily and then recycle them back into the market when buyers naturally require them to manage the risk of participating in the spot market. Importantly, the ESEM would utilise the same forward market (medium-term) contracts that are used to manage real-time wholesale spot market risks (short-term) thus creating the link between short-term, medium-term and long-term economic signals. 

What’s next for the Nelson Review?

The draft report has been positively received in Australia, albeit with recognition there is still a long way to go on the detail. Given the pressing timeframes created by the energy transition, the rejection of wholesale changes appears pragmatic. Although the ESEM will require legislative, regulatory and administrative changes, it is intended to utilise existing policy and regulatory architecture rather than reinventing from scratch. The draft report is open for consultation until 17 September and the final report is expected by the end of 2025.

Lessons for New Zealand?

The extent to which the Nelson Review might inform or affect the approach to our electricity market is yet to be seen, with the review by Frontier Economics still being considered by Cabinet. Australia differs from New Zealand in its appetite for Government underwrite (e.g., the CIS). In fact, the ESEM proposal is an attempt by the Nelson Review to evolve existing support schemes and integrate them into the NEM. However, the ESEM is expressly described as only addressing the risks the market is clearly incapable of managing [5]. 

By comparison, the New Zealand Government has to date stood firm in its reliance on the market to provide signals and respond with solutions with minimal government intervention. The terms of reference for the review of New Zealand’s electricity market specifically required consideration of the “distinctive aspects of the New Zealand system including the absence of generation or retail subsidies and the operational independence of the sector”.

The Nelson Review describes New Zealand’s market-driven approach as highlighting “the trade-offs between market reliance and revenue certainty” [6]. We await the Frontier Economics report and Cabinet’s decisions to see what the Government is willing to do to address investment barriers.

Please get in touch with one of our energy experts if you would like to know more about what is happening in the Australian energy sector and how it might affect your business.

Footnotes

1. The CIS is an Australian Government revenue underwriting scheme designed to reduce financial risk and accelerate investment in renewable energy generation and clean dispatchable capacity (e.g., batteries).

2. A market maker offers both bid (the highest price they will buy) and ask (the lowest price they will sell) quotes for standardised derivative contracts on a transparent platform, e.g., an exchange or through bilateral negotiations in over-the-counter markets. A “bid-ask spread” is the difference between the highest price at which a market participant is willing to buy an asset and the lowest price at which a market participant is willing to sell the same asset. Market making mechanisms provide liquidity and price transparency in electricity markets. See p.126ff of the draft report for more detail including a case study of New Zealand’s market making experience on p.130.

3. The Panel uses New Zealand’s super peak contract as a successful case study in co-design (see p.125). We note that the Electricity Authority is now considering regulating super peak product trading via market making, see Regulating the standardised super-peak hedge contract: issues and options.

4. Sellers compete to offer the lowest price to the buyer.

5. See p. 154 of the draft report.

6. See p.61 of the draft report.