Unlocking energy investment at scale: a possible change to the core contracting model for renewable assets

Contracting in a new era: lessons from the Nelson Review 8 min read

The National Electricity Market wholesale market settings review (the Nelson Review) sits at the centre of the significant changes currently facing Australia's energy system. It proposes a new contracting framework—the Electricity Services Entry Mechanism (ESEM)—that could redefine how energy is valued and risk is shared across the market. For investors, developers and financiers, understanding this model is critical to navigating the next phase of the transition.

In this video, Tim Nelson, Chair of the panel which authored the Nelson Review, steps through what’s changing and what the move to the ESEM could mean in practice for energy market participants.

A shifting market to reflect system value

The ESEM has the potential to reshape how value and risk are allocated across the market, creating both opportunity and uncertainty for investors, developers and financiers.

In this Insight, we examine how the ESEM differs from traditional contracting models and consider what it could mean for project bankability and investment timing.

Key takeaways

• The Nelson Review seeks to refresh energy market contracting to meet the unique features and requirements of the modern grid in an efficient and effective manner.
• The proposed ESEM introduces three new contract structures for bulk zero emissions energy, shaping and firming respectively, with the bulk energy contract set to replace traditional run‑of‑plant PPAs and Capacity Investment Scheme Agreements (CISAs).
• The new model, if implemented in its proposed form, will change how price, volume and shape risk are allocated between generators and buyers.
• These changes will influence project bankability, financing structures and the timing of investment decisions.

How will the ESEM change the way participants currently contract?

At the core of the Nelson Review's policy recommendations is a recognition that the NEM's design—built for large-scale, centralised generation—is being stretched by the rapid proliferation of diffuse and variable renewable power and storage. To address the mismatch between long-term investment signals and the energy derivatives market, the review proposes the ESEM: a framework for contracting energy services that better reflects dispatch outcomes and system needs. It sets out three contract types, with the bulk zero emissions energy contract as the cornerstone for new renewable developers.

Under the model put forward by the trial contract co-design working group, generators would enter into a swap for a pre-agreed volume that settles on a dispatch‑weighted average price for a reference set of generators.

This represents a fundamental departure from the traditional run‑of‑plant PPA model, where output and price are directly linked to the performance of a single asset. It also represents a structural shift in how risk is allocated and managed across the market. While it aims to create a more liquid, standardised contracting environment, it also introduces new forms of exposure that participants will need to understand and price.

There are three key differences from the traditional run of plant PPA that renewable generation developers and financiers should consider:

1. Fungibility: the contract is designed to be fungible—rather than negotiating bespoke terms with a specific plant, the terms of the swap will be identical across generators. The advantage of a fungible, consistent contract design is that the ESEM Administrator can more easily recycle the contracts back into the short-term derivates market.
2. Volume: under a traditional PPA, the generator’s revenue is tied to actual output of the particular facility. The bulk energy contract reverses this dynamic. Generators must settle on a pre‑agreed volume regardless of actual generation, creating volume risk. If output is lower than expected, the generator still settles on the contracted amount.
3. Price: in addition, because settlement is based on a dispatch‑weighted average price rather than the pool price received from AEMO, generators face shape risk—being the risk that their generation profile does not match the reference shape. This can create mismatches between revenue and settlement obligations, particularly for intermittent renewables.

While the ESEM aims to simplify and standardise contracting, participants at our recent roundtable noted the model’s practical implementation could prove complex. The mechanism relies heavily on the ESEM Administrator (which is likely to be AusEnergy Services Limited) and related bodies to manage auctions, settlements and potentially derivative trading. These administrative and execution risks will need careful design and resourcing to avoid bottlenecks or unintended market distortions.

Another open question is whether the ESEM will deepen market liquidity or simply reallocate volume from existing offtake markets. The intent is for contracts to be recycled and traded over time, but the extent to which this creates genuine secondary market depth remains to be seen.

Financing and bankability

The CISA was introduced to underwrite investment in new generation and storage by reducing revenue risk as coal exits the system. However, it was never singularly sufficient. From the outset, it was recognised as necessary but incomplete: the scheme focuses on capacity (MW) rather than the specific services the modern power system needs to remain reliable and secure. As the NEM becomes increasingly dominated by variable renewables, system risks relate less to how much capacity exists and more to when, how and what kind of capacity is available; eg firmness, flexibility, inertia or fast response.

Rather than solely underwriting the construction of a new plant, the ESEM would support targeted entry of services (eg firm dispatchable capability and other essential system services) through coordinated procurement and standardised contracting. This approach seeks to provide clearer investment signals, reduce fragmentation across state schemes and better align public support with the operational needs of a high‑renewables NEM.

Together, these mechanisms are intended to improve market confidence and bankability by reducing uncertainty around revenue streams and ensuring that public investment supports assets delivering genuine system value. The success of the ESEM, however, will depend on clear, transparent procurement processes and bankable contract structures in order to attract the scale of private capital needed for the energy transition.

Timing and transition

The following timeline outlines key milestones in the design and implementation of the ESEM and broader NEM reforms:

As Dr Nelson noted in the recent roundtable at Allens, the next phase now sits with the Department of Climate Change, Energy, the Environment and Water. What was initially expected by the end of 2026 has shifted, now more likely landing closer to late 2027. While the Department carries out further policy development and market consultation, participants should monitor how the ESEM framework evolves and is received across the market, taking the opportunity to consider how these structures might interact with existing PPAs, CISAs and merchant trading strategies.

Next steps

The Nelson Review offers a blueprint for how Australia’s electricity market could evolve to support the transition. While implementation details remain uncertain, the direction is clear: contracting will increasingly reflect system value rather than simple output.

Market participants can prepare now by:

• modelling exposure under dispatch‑weighted and volume‑based settlement structures;
• testing financing implications with lenders and investors to understand how bankability metrics may shift;
• engaging early in policy and industry consultations to help shape the design of the three proposed ESEM contracts; and
• exploring hybrid approaches that combine ESEM mechanisms with traditional PPAs or hedging instruments.

Proactive engagement will position investors, developers and financiers to adapt quickly as the market framework becomes clearer and the next phase of reform takes shape.

The ESEM represents a bold attempt to align financial contracting with system value. Its success will depend on disciplined policy design, credible administration and sustained engagement from investors and financiers. As the framework evolves, there is a clear role for industry participants, and their advisers, to help shape practical, bankable solutions that deliver on the review’s intent.