The shape of PPAs is changing – from volume to value

Australia’s renewable energy market is entering a new phase where the value of electricity is increasingly determined not by energy alone, but by the ability to deliver energy when and where it is needed. ERM argued in early 2025 that the energy transition was overlooking a critical market: the market for risk. Eighteen months after, and the shift from simply paying for renewable output to demanding firmness and shape is already evident. An example deal being the 600MW, 12-year South Australian supply agreement between Firmus and Swiss commodity trading firm Gunvor.

As coal-fired power stations retire, they remove not only physical generation capacity from the National Electricity Market (NEM) but also a significant source of financial hedging products. This will increasingly impact market liquidity of traditional ASX and Over the Counter (OTC) hedging products and drive demand for a new generation of bulk renewable energy, shaping and firming services.

Large renewable energy generators and battery owner-operators can no longer stand on the sideline.

The intersecting policy catalysts, redefining revenue strategies over the next 3-to 5-years

Several intersecting policy initiatives have been driving the transition to a renewable power system in the NEM, with the Federal Capacity Investment Scheme (CIS) taking over from the Commonwealth Renewable Energy Target (RET) Scheme to incentivise pre-2030 investment in renewables and storage alongside the NSW Long-term energy services agreements (LTESA), Victorian Renewable Energy Target (VRET) Scheme and SA Firm Energy Reliability Mechanism (FERM).

Australia’s renewable energy market is now approaching a significant inflection point. Looking beyond 2030, the Electricity Services Entry Mechanism (ESEM) proposed by the NEM Wholesale Market Settings Review Panel, is expected to become a key driver of long-term investment in renewables and storage. Importantly, the ESEM is emerging at the same time as Federal and state government policy initiatives. These policies place obligations on data centres to contract for new renewable supply, as well as address shaping and firmness to contribute towards system reliability.

These policy developments respond to the same underlying market reality: buyers will be seeking solutions that combine energy, shape and firmness. ESEM attempts to create liquid products for these services, while emerging data centre policies seek to mandate their procurement. Together they signal a fundamental shift away from energy-only PPAs.

Unlocking the value premium: why ESEM and data centres are reshaping renewable offtakes

Practical implications of fungibility? This simply means one MW or MWh is interchangeable with another identical unit, regardless of which project underpins the product. Products must thus be standardised to ensure liquidity. This implies a shift away from the physical project context that has driven many key commercial terms (e.g. force majeure, thermal curtailment, etc.) under run of plant, tolling and capacity swap agreements.

Unlike earlier support schemes, the ESEM is intended to create liquid, standardised products capable of bridging the gap between short-dated exchange-traded contracts and the long-term revenue certainty required to finance large renewable and storage projects. To achieve this, products must be sufficiently fungible and detached from the characteristics of individual projects to support secondary market trading. This represents a fundamental departure from the traditional run-of-plant PPA model.

The legislation and rules required to implement the first tranche of priority ESEM products are expected to be finalised by March 2027. Based on the current design, key implications for renewable generators and storage owners are significant. Rather than transferring shape and volume risk to buyers, sellers will increasingly be expected to manage and underwrite these risks themselves. Capturing the value premium and tenure available under the ESEM will favour asset operators with diversified portfolios, sophisticated trading capability and an ability to manage shape, volume and firmness risk over long contracting horizons.

At the same time, data centres are rapidly emerging as a new category of buyer. The AEMC’s advice to the Commonwealth, the NSW Data Centre Guidelines and Victorian Sustainable Data Centre Action Plan point towards future obligations that require large data centres to support additional renewable generation, firming capacity and demand flexibility. Unlike the corporate PPA buyers that dominated the first wave of renewable procurement, data centres may need integrated solutions that address renewable energy, firming and compliance requirements simultaneously.

For sellers, data centres represent a substantial growth opportunity. However, the capabilities required to compete effectively in this market are likely to mirror those needed under emerging ESEM product constructs, namely the ability to package energy, shaping and firmness solutions through sophisticated portfolio and risk management.

Monitor data centre policy evolution and potential tension at state and federal levels

This is early days in shaping data centre policies, with significant work still to be done to align federal and state policies. To prepare your organisation to be well positioned to capture the data centre opportunity, you must carefully consider both the similarities and differences between the obligations proposed at Federal and state level. Whilst the Victorian energy- related recommendations for data centres suggest alignment with the Commonwealth framework, subject to finalisation, the NSW Government’s proposals differ from the AEMC’s recommendations in several material respects, as outlined below.

Looking Ahead: The Next Generation of Offtake Markets

Data centres represent an attractive new class of renewable energy buyer. They have large and growing electricity demand. Furthermore, unlike many energy-intensive industrial sectors, electricity costs, while significant in absolute terms for data centres, often represent a smaller proportion of overall operating costs, which combined with emerging renewable energy and firming obligations may increase both their willingness and ability to pay for renewable energy and firming services.

Whilst significant uncertainty remains around both data centre policy settings and the implementation of NEM Review and ESEM reforms, it is increasingly clear is that the market is moving beyond traditional run-of-plant PPAs. The retirement of coal generation, the emergence of ESEM, and the rapid growth of data centres are accelerating the unbundling of value into three distinct categories:

• Bulk renewable energy
• Shaping services
• Firming services

In this environment, future buyers are likely to seek integrated solutions that combine these elements within a single offtake arrangement. The organisations best positioned to succeed in this next phase of the energy transition are therefore unlikely to be those with the lowest-cost wind, solar or battery assets alone. Instead, competitive advantage will increasingly reside with participants that can offer:

• Structure products that solve buyer obligations rather than simply sell electricity
• Effectively monetise shaping and firmness alongside energy, backed by sophisticated trading and risk management capabilities
• Operate diversified renewable and storage portfolios.

Does your organisation have the trading, portfolio and risk-management capabilities needed to compete in this future market?

 

 

[1] The blocks currently proposed is standard peak, off-peak and shoulder period which in ERM’s assessment does not align with the residual demand shape of a renewables-heavy system the grid now has to manage. Under current AEMC recommendations, buyers risk holding a compliance product that is sub-optimal from a risk management perspective.

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