Energy ministers greenlight ESEM consultation package, with maiden tender targeted for 2027

As we saw reported by both RenewEconomy and The Energy yesterday, federal and state energy ministers met last Friday with all ministers (with the exception of Queensland) agreeing to release a consultation package on the core reforms coming out of the Nelson Review. That package includes draft legislation, initial draft rules and a consultation paper setting out the proposed design of the Electricity Services Entry Mechanism (ESEM). Amendments to the National Electricity Law (NEL) are made through the South Australian Parliament but conventionally require agreement from all participating jurisdictions (i.e. including Queensland).

As a quick refresher, the ESEM is the scheme recommended by the Nelson Review panel to replace the existing Capacity Investment Scheme (CIS) — which has struggled to convert awarded capacity into banked projects, as we noted in our recent analysis of its awarded pipeline. The premise of the ESEM is that the spot market and the existing contract market are not currently delivering a long enough tenor to get projects financed, so the scheme sets out a government-backed counterparty to step in and buy standardised, fungible contracts across three services — bulk energy (e.g. solar and wind), shaping (e.g. batteries) and firming (e.g. gas) — and then warehouses those contracts until they can be returned to the contract market.

The design of the contracts for each of those three services has evolved since the Nelson Review’s final report last December, as per the minutes of the industry-led co-design working group’s five meetings thus far:

• For bulk energy: The Nelson Review recommended an ex-post dispatch-weighted average swap. The working group assessed this option as loading too much volume risk onto the seller, and in their August meeting instead landed on a “Regional Reference PPA”, which settles against a regional reference fleet index rather than the seller’s own output. The group is still working out the final details of this proposed contract, such as how negative prices are treated, how the reference fleet is defined, and how genuine force majeure risk gets managed (given the working group has accepted it cannot sit inside a fungible ESEM agreement at all).
• For shaping: The group’s preferred contract is a dynamic time-of-day block spread swap, with charge and discharge blocks set day-ahead off forecast residual demand rather than fixed for the life of the contract, capped at two charge and two discharge periods a day of no less than 30 minutes each.
• For firming: The working group has settled on a $600/MWh cap rather than the $300/MWh that is the current industry standard, on the view that $600 gives sellers more headroom above typical Short Run Marginal Cost, and reduces the likelihood of generators ramping up their output during unprofitable periods to chase forecast price spikes that do not eventuate.

Key Dates

In my quick read, I saw:

• The consultation paper released on Monday is open until October 2nd,
• while submissions on the legislative package can be made via the department’s consultation hub until 11:59pm AEDT on October 13th.
• The working group next meets in person in early October, with its final report due in November (ahead of ministers taking final decisions in December).
• As per their website, ASL still anticipate that the first ESEM tender will commence in late 2027, subject to agreement from the energy ministers council.