What it means for market participants 6 min read
In order to accelerate much-needed new electricity generation and storage, the National Electricity Market should jettison the current Commonwealth generation underwriting scheme and instead move to a model where a central buyer signs long-term power purchase agreements (PPAs) with generators and storage providers.
This recommendation – to establish an Electricity Services Entry Mechanism (ESEM) – is set out in the recently released NEM Wholesale Market Setting Review Draft Report (Market Settings Review) chaired by Associate Professor Tim Nelson, and seeks to facilitate long-term investment in the NEM primarily by addressing the 'tenor-gap', being the mismatch between the long-term timeframes required for new sellers in the market, against the short-term contracts sought by market buyers.
This Insight unpacks what we know about the ESEM so far and what it will look like for market participants.
Key takeaways
- While positioned as an 'evolution' of the Capacity Investment Scheme and New South Wales' Long Term Energy Service Agreements (LTESA), the ESEM is a direct offtake arrangement and would seek to facilitate long-term investment in the NEM by providing revenue support to new generation capacity.
- A 'Central Buyer' would hold competitive auctions to award eligible proponents with ESEM contracts, which will provide revenue support during years 8 to 15 of a project's operation.
- The 'Central Buyer' would aggregate these and ultimately sell the ESEM contracts back to the market (for example, to retailers and C&I users) in an effort to improve market liquidity.
- To have your say on the ESEM, public consultation on the Market Settings Review is open until Wednesday, 17 September 2025.
What is the ESEM?
The ESEM is a mechanism that primarily seeks to address two major issues in the market; the need for long-term investment in new generation in NEM and increased market liquidity. The ESEM would:
- Through competitive auctions, award revenue support contracts to successful proponents for years 8 to 15 of a project's operation in an effort to bridge the current 'tenor gap', where the market is reluctant to enter into long-term contracts, making long-term financing of the project more difficult to secure.
- Initially focus on procuring bulk energy, shaping and firming services (see below for further detail regarding these services) but would ultimately be open to all providers, including aggregators of consumer energy resources, distributed energy resources and demand response providers (provided they can be scheduled for dispatch by AEMO).
- Be nationally consistent, although the Market Settings Review makes it clear that the jurisdictions will retain control over the energy transition in their state, and in particular, the ESEM would be linked to state energy emissions reductions targets.
How will the ESEM work?
- A 'Central Buyer' (similar to the arrangements for LTESAs) will conduct competitive auctions.
- The generator would sign an ESEM contract prior to financial close, and would commit to meet commissioning timeframes. The contract will not 'turn on' until years 8 to 15 of the project's operation, where revenue for the earlier years of the project will be expected to be obtained directly from the market.
- Each ESEM contract would be a contract for difference (CFD). Unlike market PPAs today (which are generation following and settle against the generator's actual generation) the ESEM contracts would settle against a deemed generation profile that reflects, for example, a regional weather resource.
- ESEM contracts will be held, or 'warehoused', by the Central Buyer. The Central Buyer will then sell back the ESEM contracts to the market (for example, to retailers and C&I users), in an effort to improve market liquidity.
- Where possible, the ESEM will also seek to procure Essential System Services, such as system strength and inertia, which would take the form of a second contracting structure.
Figure 1 illustrates the contract and delivery timeline of the proposed ESEM arrangement.
Figure 1: ESEM contract and delivery timeline (Years)
Who is eligible to participate in the ESEM?
The ESEM will initially focus on procuring 'bulk energy', 'shaping' and 'firming' services, which are defined in the Market Settings Review as set out in the table below.
It appears projects will be allowed to bid for multiple services if possible (for example, a pumped hydro facility which could deliver both shaping and firming services).
There will be scope for a tailored procurement approach where government policy targets specific technologies facing additional barriers (for example, offshore wind or pumped hydro).
- Zero-emissions electricity generation sent out from a generating unit or voluntarily scheduled resource.
- Examples: utility-scale and rooftop solar, offshore and onshore wind, run-of-river hydro, biomass or concentrated solar thermal.
- Technology that can consume or generate from a bidirectional unit or voluntarily scheduled resource, or consume and cease to consume from a voluntarily scheduled resource.
- Examples: utility-scale and small-scale battery storage, pumped hydro, compressed air storage and industrial demand response.
- Capacity that is capable of being dispatched continuously for the time it takes to reach the cumulative price threshold if prices are at the market price cap (currently around 7.5 hours).
- Examples: pumped hydro, long-duration batteries, compressed air storage, open cycle gas turbines, gas reciprocating engines, hydrogen turbines or engines, industrial demand response, aggregated small-scale storage and concentrated solar thermal.
Worked example of an ESEM contract
Figure 2: Example ESEM financial settlements over a day
Figure 2 illustrates a simplified example of how an ESEM contract would function for a utility-scale wind farm in NSW.
In the above scenario:
- The contract is between the generator and the Central Buyer. It operates as a generation-independent contract-for-difference, settled against the NEM spot price in the NSW region.
- The contract volume varies each trading interval in order to align with a reference quantity (for example, all wind generation in NSW, or the five nearest wind farms). We presume that this will be a percentage of nameplate calculation, proportionate to the actual generation output by the reference generators against a notional ‘100% output’ MW rating.
- The generator pays a fixed price for this reference volume and assumes the financial risk or benefit of performing above or below it. Additionally, the generator must transfer Renewable Energy Generation Certificates (REGOs) equivalent to the reference generation.
- The Central Buyer, holding a portfolio of ESEM contracts across generation, shaping and firming, can then offer these into the wholesale market, backed by the underlying ESEM arrangements.
Who should be interested in this?
The ESEM will be relevant to a wide range of energy market participants, both those that are eligible to secure ESEM contracts with the Central Buyer, as well as market buyers (such as retailers and large commercial and industrial users) who will ultimately procure ESEM contracts from the Central Buyer.
Actions you can take now
- Public consultation on the Market Settings Review is open until Wednesday, 17 September 2025.
- Keep an eye out for our upcoming Insight which will cover key issues and implications of the ESEM.