Ten questions about the Electricity Services Entry Mechanism that could reshape Australia’s renewable energy future

New offtake clearing house set to revolutionise electricity generation 12 min read

The draft report from the NEM Wholesale Market Setting Review proposes a bold new mechanism—the Electricity Services Entry Mechanism (ESEM)—to address the investment challenges facing Australia's renewable energy sector. But with so much riding on its success, stakeholders are asking: will it work?

This Insight frames the discussion around ten critical questions developers, offtakers and financiers must consider. These questions go to the heart of the ESEM's design, its potential impact on project financing and its ability to deliver the long-term certainty the market needs.

Background

The Market Settings Review identifies the 'tenor gap'—the delta between the short-term nature of wholesale electricity contract markets and the long‑term financing needs of capital-intensive renewable energy projects—as the most significant barrier to developing new electricity projects.

Naturally, the effectiveness of the proposed cure hinges on the accuracy of the diagnosis and we expect there will be much debate about the extent to which the tenor gap is dampening investment in the energy transition and whether the ESEM is the best way to solve this problem.

Moving further into the details of the regime, questions abound about the structure of the ESEM offtake contracts—to be procured and administered by a 'Central Buyer'—and the risk profile of the ESEM regime, the answers to which will be critical in getting market stakeholders comfortable with this bold new gambit.

Questions about the operation and implementation of the ESEM

With the new offtake clearing house set to revolutionise Australian electricity generation development, here is our list of the 10 key questions for players in Australia's renewables sector. 

The fundamentals: what is the ESEM trying to solve and how is it going to do it?

1. Is the tenor gap really what is holding back Australia's renewable buildout?

In assessing the efficacy of the ESEM, this is perhaps the most important question to resolve: has the Market Settings Review successfully identified the most critical bottleneck for the development of new renewable energy projects?

The Market Settings Review frames the issue of the 'tenor gap' as one affecting investment decisions—that developers are swimming in new solar and wind projects, and large electricity buyers are clamouring to enter short-term offtake agreements with them, but that both are stymied by risk-averse investors and lenders unwilling to fund projects without certainty over a project's medium-term return.

We expect this fundamental premise will be the subject of debate amongst market participants and policy architects alike. The tenor gap does not seem to have caused much indigestion for financiers investing in a spate of recent energy storage projects in the market.

Is the issue an inability to secure capital, or an unwillingness to commit efficient capital to projects that lack the price-setting, profit-making capabilities of long-duration storage? Efforts to nudge the market towards an outcome in the long-term interests of consumers will need to grapple with this question for any intervention to be successful. Market participants will also be looking to consider whether the value of the ESEM will be so significant as to overcome other challenges such as social licence issues, supply chain constraints or delays to large-scale transmission upgrades and expansions.

2. Will the ESEM solve the tenor gap in the way the Market Settings Review hopes?

According to the Market Settings Review, 'Uncertainty around the timing of coal plant retirements, rapid technological changes and shifting policy settings makes it difficult for investors to assess future market conditions and commit to financing capital intensive long term projects'.¹ While it is hard to dispute this conclusion, financiers have nevertheless found ways to commit funding to renewable energy projects in the absence of the ESEM.

So, assuming the tenor gap is as significant an issue as the Market Settings Review suggests, how will lenders change their ways in light of this new policy? More pointedly, how will the ESEM ensure the value created by central buyer offtake contracts (which provide comfort the project has secured a buyer for the middle years of its project lifecycle) is appropriately shared with electricity consumers?

Aligning ESEM offtake agreements with a project's overall commercial model 

3. How will the bulk energy profile be set? 

Unlike market PPAs today (which are typically generation following and settle against the generator's actual generation), ESEM offtake contracts would settle against a reference generation profile. While the Market Settings Review does not detail how the bulk energy profile will be set (examples given include all variable energy production within a state or the five nearest generators of that technology type), the allocation of resource risk will, of course, be critical to how appealing these generation-independent contracts-for-difference will be to developers and financiers alike.

For instance, will the profile be a fixed baseline or a range that permits some variability between projects? Two wind farms, both alike in location, may be capable of markedly different generation depending on the available turbine technology at the time of their construction. If the bulk energy profile is indeed set on broader terms (ie all variable generation in a state), how will congestion and constraint risk be allocated? 

4. How can projects provide multiple services within the ESEM? 

The ESEM will operate by procuring 'core in-market services', which the Market Settings Review recommends at the commencement of the regime will be bulk energy, shaping and firming. The ideal scenario, according to the Market Settings Review, is that 'new projects should be able to bid to provide more than one service, as this could be the most efficient outcome'.² However, there is not a great amount of detail as to how projects can provide multiple services without undue complexity (indeed, this is one of the questions on which the Market Settings Review is seeking further feedback).

Each service requires a tailored contract structure to maximise the benefits of the ESEM, but it would seem to be a strange outcome for a concentrated solar thermal facility to have two separate but overlapping 'bulk energy' and 'firming' contracts with the Central Buyer (especially if it is unclear which service takes priority over the other). The aggregation of these services under a single contract would be simpler to administer but possibly more complicated to recycle into the market. We expect there will be significant back and forth during the consultation process on this point as the Market Settings Review and market participants seek to balance efficient outcomes with efficient administration. 

5. How will system services be valued? 

The ESEM contemplates that the scheme administrator will, in consultation with network service providers, procure essential system services (ESS) from projects contracted under the ESEM. This is proposed to take place by way of optional secondary contracts that sit alongside bulk energy, shaping and firming support.

The ESS contract would, per the Market Settings Review, 'provide a stable revenue stream to cover incremental equipment costs, such as clutches for gas turbines or grid-forming functionality in batteries'.³ While there are certainly aspects of this regime we expect will be attractive to project developers looking to diversify their revenue stack, it remains to be seen exactly how ESS will be priced (and recovered) by the Central Buyer and how this sits alongside network service providers' existing responsibilities for managing the provision of ESS.

6. How will the ESEM deal with construction and commissioning delays? 

In the context of aligning the ESEM with the orderly exit of Australia's aging fleet of thermal generators, the Market Settings Review remarks that, to 'give jurisdictions confidence that projects are delivered on time, it will be important for the ESEM to ensure commissioning timeframes are met'.⁴ 

However, given the well-publicised challenges in developing and commissioning new generation, what will happen if a contracted project fails to meet its commissioning timeframes? Will a delay to the commencement of the commercial operation of the project flow through to the start date of the supply term under the ESEM offtake, or will the ESEM have a fixed start date? Could these delays result in the Central Buyer exercising termination rights under the ESEM offtake agreement?

Similarly, will lenders be afforded the opportunity to step in and cure a developer's default before the Central Buyer is afforded recourse?

It will be critical for developers and funders alike to understand how the ESEM will manage risks associated with delays to construction and commissioning and the contract risks if a project is delayed past a fixed sunset date. 

7. Will the Central Buyer be an active offtaker?

Given the focus of the ESEM is the middle years of a project's lifecycle, the Market Settings Review notes that projects will be 'free to contract as appropriate' for their early years 'with no ESEM involvement'.⁵ But exactly how hands-off will the Central Buyer be in the intervening years before the commencement of the ESEM offtake term?

At a minimum, drawing from the regime under the Capacity Investment Scheme (CIS) by analogy, the Central Buyer may seek to impose reporting and audit obligations during this period. It raises the question of whether there are other more onerous obligations as to the maintenance and upkeep of the plant (including, for instance, obligations to reinstate in the event of damage to the facility). We expect developers will also be eager to understand the nature of these obligations before the commencement of the offtake term of the ESEM and, specifically, how they might interact with the developer's other offtake, financing and insurance arrangements.

'Evolution, not revolution': The Government's role in the ESEM

8. How does the ESEM compare to other government underwriting schemes?

A design feature of the ESEM is to 'utilise the existing policy and regulatory architecture rather than reinventing it from scratch', aiming to limit market disruptions and expedite uptake by building on existing frameworks which have become familiar to market participants'.⁶ The ESEM is not only designed to cherry-pick the best aspects of the numerous publicly backed renewable energy underwriting gambits over the past decade, but to ultimately absorb them into its unified, centralised operation.

But, given the Market Setting Review's lukewarm views on extensions to existing long-term revenue support schemes in the NEM such as the CIS, how exactly will the ESEM depart from its predecessors? From a structural perspective, the clear answer is that the ESEM is unique in the systematic process by which it will return contracts to the market. But there are other distinct features the market will need time to adjust to. For example, the ESEM is open to all providers of a given service that are able to be scheduled for dispatch by AEMO (including distributed resources and demand response providers), which may increase competition during the competitive auctions. Another key difference is the transparency of the process—unlike the CIS, which provides limited visibility over the terms of finalised agreements, the Market Settings Review recommends informing the market of ESEM contract prices.

9. How much will the ESEM differ between states?

The intention is for the ESEM to be housed in the National Electricity Rules through a coordinated package of statutory amendments. One clear benefit of this approach is to codify the scheme in legislation and provide greater long-term certainty. But what will the jurisdictional adoption of the ESEM actually mean in practice?

According to the Market Settings Review, 'In the absence of a nationally consistent replacement for the CIS, investment will be driven by state-based schemes, resulting in a more complicated and fractured investment landscape, which may fall short of what the system needs'.⁷  At the same time, a key design feature of the ESEM is that states 'will retain control of the pace and nature of their electricity system transition'.⁸ The Market Settings Review insists these ideas are not at odds with one another—the ESEM can retain consistency and stability while permitting jurisdiction-specific interventions (eg one state might permit gas turbines to provide essential system services where another might not). To provide long-term stability, we expect developers will be keen to understand exactly how much state governments will be willing to derogate from the uniform ESEM framework.

10. What happens if the market moves against the ESEM's Central Buyer?

Under the ESEM, the Central Buyer will bear some financial risk, depending on the price paid for contracts at tender and the price received when the contracts are recycled back into the market. The intention is that losses from closing out positions will be recovered from electricity users, but it is not clear from the Market Settings Review what parameters (if any) will be imposed on the Central Buyer in taking on these risks and how that will affect the kinds of projects selected as part of the tender process.

From a project financing perspective, we expect lenders will be focused on the creditworthiness of the Central Buyer. This is likely to extend to topics such as legal status, governance arrangements, funding backstops and hedge accounting policies. The answers to these questions will be critical to understanding how comfortable the market will be with the Central Buyer stepping in as a central buyer in the renewable offtake market.

Actions you can take now

• Public consultation on the Market Settings Review is open until Wednesday, 17 September 2025.
• Read our previous Insight below, where we outline how the proposed ESEM is expected to operate.