A leading national law firm.
Linkedin

National Electricity Market Wholesale Settings Review: Draft Report

The Commonwealth Department of Climate Change, Energy, Environment and Water (DCCEEW) has released a Draft Report on the future of the National Electricity Market. The expert panel highlights increasing variability and volatility driven by renewable energy and proposes nine recommendations to strengthen spot, derivatives, and investment markets, with a focus on long-term consumer benefit.

September 1 2025

By Sarah Pick, Partner

 

1. Background to the Review

The Commonwealth Department of Climate Change, Energy, Environment and Water (DCCEEW) supported an expert panel-led review into market settings to promote investment in firmed, renewable generation and storage capacity in the National Electricity Market (NEM) following the impending finish of the Capacity Investment Scheme (CIS) tenders in 2027 (Review).[1]

The expert panel consists of Panel Chair, Tim Nelson and members Ms Paula Conboy, Ms Ava Hancock and Mr Phil Hirschhorn (Panel).

DCCEEW provided in the Terms of Reference that when undertaking the Review, the Panel should consider the following:[2]

  • “Interactions with the NEM reliability framework, to ensure clear and transparent settings that align with the proposed reforms and best serve the long-term interest of consumers.
  • Interactions with governments’ renewable energy targets and policies in promoting investment, including the role of enduring jurisdictional schemes such as the NSW Roadmap.
  • The importance of decarbonising Australia’s electricity system for achieving the Australian Government’s legislated commitments to achieving a 43 per cent reduction in emissions on 2005 levels by 2030 and net zero emissions by 2050.
  • The pathway for implementation of the reforms, including the requirement for agreement at ECMC before amendments to the National Electricity Law (NEL) and National Electricity Rules (NER) can be progressed.”[3]

The Terms of Reference further provide[4] that the Panel will make actional recommendations to facilitate the development and staged implementation of reforms of the NEM wholesale market that will support the achievement of the National Electricity Objective.[5]

In undertaking the Review, the Panel is required to undertake a broad and detailed level of consultation with state and territory governments, the Australian Energy Market Commission (AEMC), the Australian Energy Market Operator (AEMO), the Australian Energy Regulator (AER), the Australian Competition and Consumer Commission, the Clean Energy Regulator and Clean Energy Finance Corporation, industry participants, unions, and consumer representatives on relevant matters.[6]

2. The Draft Report

Following the initial consultation process which involved (amongst other things) the Panel receiving more than 100 formal submissions and holding more than 200 formal stakeholder meetings, on 6 August 2025, the Panel released its Draft Report for the Review (Draft Report).

The Draft Report reflects the Panel’s specific focus on the needs of electricity sellers as well as electricity buyers in relation to the wholesale spot market, related derivatives market, and long-term investment market. The Panel has noted that during its consultation process it has received a consistent message:

“While the NEM continues to function reasonably efficiently for dispatch, the cumulative pressures across short-, medium- and long-term horizons demand coordinated forward-looking reform.”[7]

The Panel notes that the key reason for needing change from a wholesale market pricing perspective, is the shift from a system where principal price drivers have been demand and supply-side fuel costs, towards a system where principal price drivers now include the impact of supply-side variability that come with the increasing number of weather dependent variable renewable energy (VRE) sources.

This shift is impacting the three key markets that influence the NEM wholesale electricity prices:

  • the short-term spot market;
  • the medium-term derivative market; and
  • long-term investment market.

The Draft Report makes key observations in relation to each of these markets, which facilitated the Panel in determining its draft recommendations.

The wholesale market is moving towards more variability and more volatility, which is summed up appropriately by the Panel as follows:

“Prices are likely to become predictably more variable and unpredictably more volatile.“[8]

This means that, because of the nature of VRE, predicting pricing will become easier because solar output, and seasonal wind patterns, will become more evident and consequently more accurately forecast. However, the significant impact on the spot market of unpredictable, unanticipated, and uncontrollable sudden events, such as unforeseen extended periods of low solar output and low wind and unplanned capacity withdrawal during generator and network outages, is something that is much more challenging to predict and plan for.

The Panel also (and unsurprisingly) notes that “one of the more pressing concerns in the spot market is the emergence of a growing class of non-scheduled resources that are responding to wholesale prices (‘hidden participants’) whose behaviours and impact on the system are not directly visible to the AEMO and market participants in real time”.[9] This is a reference to the ever-growing number of consumer-controlled energy resources including rooftop solar, battery storage and electric vehicles. Through developments in technology and behind the meter energy resources, today, electricity customers are no longer only consumers of electricity – they are now producers of electricity too. The lack of visibility of the actions of these ‘hidden participants’ by AEMO and other market participants is increasingly making it more difficult for system frequency, system strength and other essential system services to be consistently maintained. This has been an issue of growing concern over the past decade or so as the number of these ‘behind the meter’ consumer controlled energy resources continue to grow rapidly, and, as the Panel notes, is increasingly impacting system security and wholesale prices.

The Panel has identified that the real time energy only wholesale spot market should remain and reforms should be centred around achieving the following outcomes[10] for the three key players in the electricity market:

  • achieving pricing accuracy and certainty through sharpening pricing signals and improving access to financial risk management tools to benefit the sellers of electricity (i.e. generators, demand response providers and businesses participating via aggregators);
  • enabling the spot market to deliver efficient spot price formation and the derivatives market to deliver stable and transparent contract prices to benefit the buyers of electricity (i.e. retailers and commercial and industrial users); and
  • ensuring access to reliable electricity at equitable and predictable prices for consumers of electricity (regardless of whether they have consumer energy resources) and enabling fair and reasonable benefits for those who choose to provide services to the system.

In the Panel’s opinion, these outcomes will only be achieved if, for the first time ever, there are deliberate and explicit links between the short-term spot markets, the medium-term derivative markets and long-term investment markets.

3. The Recommendations

The Panel has identified nine recommendations that aim to address the issues and achieve the outcomes discussed in paragraph 2 above. The nine recommendations are separated into the following 3 themes:[11]

  • Theme 1: Ensuring effective operation of the spot market – reforms that support the continued efficient operation of the spot market
  • Theme 2: Maintaining liquidity in the derivatives market – reforms to enhance liquidity in the short-to-medium term derivatives market
  • Theme 3: Unlocking long-term investment in new energy services – reforms to support new investment in the services the NEM needs

Most of the recommendations consist of a number of ‘sub’ recommendations. To provide an adequate snapshot understanding of each of the nine recommendations (including their purpose and what they seek to achieve), the following tables set out:

  • for each theme, the recommendations that fall under that theme; and
  • for each recommendation, any ‘sub’ recommendations that fall under that recommendation.

Theme 1: Ensuring effective operation of the spot market

Recommendation 1
Maintain the real-time regional energy-only spot market as the core market for efficient dispatch and rewarding the provision of physical energy services.[12]
Recommendation 2
Energy ministers should require a broader range of price-responsive resources to be visible or dispatchable to participate in price formation.[13]
  • Recommendation 1A: Retain the real-time regional energy-only spot market with necessary rule changes to ensure its continued efficient and competitive operation, recognising that increasing spot market prices variability and volatility can be managed.[14]
  • Recommendation 1B: Do not create additional mandatory centralised short-term (operational timeframe) markets, such as capacity markets or physical ahead markets.[15]
  • Recommendation 1C: Do not implement locational marginal pricing (LMP) or variants considered previously.[16]
  • Recommendation 1D: Do not create distribution-level wholesale energy markets. Instead, facilitate distribution-level energy resources to participate in regional markets and use dynamic operating envelopes and dynamic network tariffs to manage local constraints.[17]
  • Recommendation 2A: Leverage the VSR participant categories established under the IPRR dispatch mode framework to give effect to Recommendation 2B.[18]
  • Recommendation 2B: Energy ministers should propose a rule change to the AEMC requiring that, by 2030, various forms of price-responsive resources should be visible or dispatchable in a relevant participant category, with this obligation falling on the relevant participant.[19]
  • Recommendation 2C: Energy ministers should establish a structured support framework to encourage price-responsive resources to participate in the IPRR framework, WDRM or as scheduled loads.[20]

Recommendation 3
Governments should focus reforms and support for CER on facilitating market participation to enable consumers to benefit from being price responsive.[21]
Recommendation 4
Market bodies should use the rule change process to ensure the efficient and competitive functioning of the real-time energy-only spot market.[22]
Recommendation 5
The Reliability Panel should consider adjusting the form of the market price settings over time.[23]
  • Recommendation 3A: Energy ministers should focus the National CER Roadmap on – and ensure sufficient resources are allocated to – delivering the critical roadmap elements that enable market participation (e.g. technical standards) and provide consumer protections.[24]
  • Recommendation 3B: Government incentives for investment in CER, such as for batteries, should support resources that are enabled to participate in the market through aggregators and are ready for dynamic network connections.[25]
  • Recommendation 4A: Market bodies and the Australian Competition and Consumer Commission (ACCC) should work together to develop regulatory responses, including rule changes if needed, that address risks created by excessive rebidding and algorithmic bidding.[26]
  • Recommendation 4B: Market bodies should analyse whether publishing battery state of charge information from July 2025 adequately mitigates reliability risks or whether further reforms are needed.[27]
  • Recommendation 4C: Market bodies should work to minimise the impact of transmission network outages on the energy-only spot market.[28]
  • The current market price settings, which include the market cap (MPC), the market price floor (MPF), the cumulative price threshold (CPT) and the administered price cap (APC) should continue to be linked to:
    • the value of customer reliability; and
    • revenue adequacy for bulk energy, shaping and firming services.
  • As a result of the significant changes the market is facing and the transition to more VRE sources, the Reliability Panel should consider changing the form of these market price settings over time to allow for a longer-term outlook.

Theme 2: Maintaining liquidity in the derivatives market

Recommendation 6
Energy ministers should establish an always-on market making obligation (MMO) in the NEL / NER for a small number of key derivative contracts in each NEM region, with contract types determined through a co-design process with the AER and industry.[29]
Recommendation 7
Ensure sufficient market information is available to support longer term derivatives market liquidity and price discovery.[30]
  • Recommendation 6A: The MMO should apply to all participants above a pre-defined size and prescribe volumes that must be made available for trading and a limit on the bid–ask spread, with contract types determined through a co-design process with AER and industry.[31]
  • Recommendation 6B: The AER should regularly convene (e.g. every two years) with industry (financial market bodies, brokers, generators, retailers and electricity users) to define a small set of core derivative contracts that sit at the heart of the electricity market.[32]
  • Recommendation 6C: During the second half of 2025 the Panel will work with stakeholders to explore approaches to improve the accessibility of derivatives markets, with a focus on NEM prudential requirements, financial market margining requirements and the interaction between the two.[33]
  • Energy ministers should propose a rule change to the AEMC that extends the MT PASA’s generation availability projections from three to five years and makes them public.

Theme 3: Unlocking long-term investment in new energy services

Recommendation 8
Energy ministers should establish an ESEM within the NEL to facilitate investment in the NEM.
Recommendation 9
Governments and market bodies in the NEM should pursue a coordinated suite of reforms to ensure regulatory settings, the innovation ecosystem, and existing policies and programs are aligned with the ESEM.[34]
  • Recommendation 8A: Establish in the NEL an ESEM that has the key features identified by the Panel on page 154 of the Draft Report. [35]
  • Recommendation 8B: Where cost-effective, projects facilitated through the ESEM should also be able to provide essential system services (ESS). [36]
  • Recommendation 8C: A framework should be established to ensure the ESEM is able to consider market concentration when running tenders. [37]
    • Recommendation 9A: Governments should clarify how their greenhouse gas emissions targets apply to projects procured to provide firming services, to provide certainty for investors. [38]
    • Recommendation 9B: The Australian Government should task ARENA to accelerate the development and deployment of zero emissions technologies that provide firming at scale. [39]
    • Recommendation 9C: Governments overseeing existing generation underwriting schemes to support long-term investment should consider options to improve derivative market liquidity. [40]
    • Recommendation 9D: The AEMC should review interconnector hedging arrangements to improve long-term certainty. For example, this could include options to the effect of extending the timeframe for inter-regional settlement residue units beyond three years. [41]
    • Recommendation 9E: Once energy ministers are satisfied the ESEM and the Panel’s proposed market making obligation are working effectively, they should look to phase out the Retail Reliability Obligation. [42]
    • Recommendation 9F: Once the ESEM framework is established, energy ministers should consider opportunities to rationalise NEM forecasting and planning documents to avoid inconsistencies and duplication. [43]
    • Recommendation 9G: Energy ministers should pursue reforms to improve consistency in the treatment of load, storage and generators connected at distribution and transmission level, to ensure a level playing field. [44]

 

4. The Observations

In addition to the three themes identified in paragraph 3 above, the Panel also identified a fourth and final theme of recommendations to ensure consumer benefit. For this fourth theme, the Panel chose to shift from making formal recommendations to instead providing a number of draft observations that highlight a number of broader consumer benefits that could be achieved because of the reform. The below table lists these observations.

Theme 4: Ensuring consumers benefits 

Observation 1: Consider supporting the development of simple, multi-year fixed price retail contracts. [45]
Observation 2: Consider reforming network tariff structures to ensure they are more equitable and better aligned with wholesale market dynamics. [46]
Observation 3: Consider updating the methodology for regulated retail price benchmarks (such as the DMO) to reflect the evolving nature of the derivatives market in the context of new contract structures and market making obligations. [47]
Observation 4: Consider extending the National Energy Customer Framework to cover new energy services, including CER aggregation, and explore the introduction of an overarching consumer duty to protect customers engaging with more complex service offerings. [48]

The Panel’s purpose of including these observations as a means of highlighting that coordinated reforms across the whole NEM could amplify the impact of its nine recommendations and specifically identifying, through the 4 observations, 4 opportunities for all the NEM jurisdictions (particularly the relevant state and territory governments) and the market bodies to work together to facilitate a united reform that will achieve the desired outcomes of the recommendations. Inconsistencies and ad-hoc jurisdictional specific government interventions across the NEM has been increasing, and to ensure the effectiveness of any reform of the NEM wholesale market settings, a consistent and collective approach across all participating jurisdictions is paramount.

5. Next Steps

The Panel is seeking feedback from industry on the Draft Report and we note that:

  • general feedback is requested in relation to Recommendation 1, Recommendation 3 and the Observations; and
  • in relation to Recommendations 2, 4, 5, 6,7, 8 and 9, whilst general feedback is also requested, there are a number of specific questions for which the Panel has sought feedback.

The consultation period will end on 17 September 2025 as the Panel works towards finalising the Review and issuing its Final Report by the end of 2025.

Please reach out if you need any assistance in relation to considering the Draft Report and how it might affect your business and potential issues to raise during the consultation period.

 

 

[1] Paragraph 1 of Terms of Reference for the Review into market settings to promote investment in firmed, renewable generation and storage capacity in the National Electricity Market to follow the Capacity Investment Scheme (Terms of Reference).

[2] The Terms of Reference expressly excluded fuel markets, carbon markets and planning assessment reform from the scope of the Review.

[3] Paragraph 11 of Terms of Reference.

[4] Paragraph 10 of the Terms of Reference.

[5] The National Electricity Objective (NEO) is set out in the National Electricity Law and is “to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to:

  • price, quality, safety, reliability and security of supply of electricity; and
  • the reliability, safety and security of the national electricity system; and
  • the achievement of targets set by a participating jurisdiction for reducing Australia’s greenhouse gas emissions or that are likely to contribute to reducing Australia’s greenhouse gas emissions.”

[6] Paragraph 16 of the Terms of Reference.

[7] Page 7 of the Draft Report.

[8] Page 9 of the Draft Report.

[9] Page 9 of the Draft Report.

[10] Page 17 of Draft Report.

[11] Page 17 of the Draft Report.

[12] Pages 67 to 78 of the Draft Report.

[13] Pages 79 to 101 of Draft Report.

[14] Page 71 of the Draft Report.

[15] Page 73 of the Draft Report.

[16] Page 75 of the Draft Report.

[17] Page 78 of the Draft Report.

[18] Page 92 of the Draft Report.

[19] Page 94 of the Draft Report.

[20] Page 99 of the Draft Report.

[21] Pages 102 to 104 of the Draft Report.

[22] Pages 105 to 110 of the Draft Report.

[23] Page 111 to 116 of the Draft Report.

[24] Page 102 of the Draft Report.

[25] Page 104 of the Draft Report.

[26] Page 105 of the Draft Report.

[27] Page 108 of the Draft Report.

[28] Page 109 of the Draft Report.

[29] Page 120 to 146 of the Draft Report.

[30] Page 147 to 148 of the Draft Report.

[31] Page 133 of the Draft Report.

[32] Page 139 of the Draft Report.

[33] Page 142 of the Draft Report.

[34] Page 189 to 200 of the Draft Report.

[35] Page 154 of the Draft Report.

[36] Page 174 of the Draft Report.

[37] Page 183 of the Draft Report.

[38] Page 191 of the Draft Report.

[39] Page 192 of the Draft Report.

[40] Page 194 of the Draft Report.

[41] Page 195 of the Draft Report.

[42] Page 197 of the Draft Report.

[43] Page 198 of the Draft Report.

[44] Page 199 of the Draft Report.

[45] Page 203 of the Draft Report.

[46] Page 212 of the Draft Report.

[47] Page 221 of the Draft Report.

[48] Page 222 of the Draft Report.

If you would like further information or have any queries regarding other matters, please do not hesitate to contact:

Sarah Pick

Partner

More Insights