From Energy to Flexibility: Rewiring Australia’s Wholesale Markets for Net Zero

Australia’s energy transition is often described as a story of technology- solar, wind, batteries, hydro. But the real transformation lies deeper. It is fundamentally a story about markets: how they evolve to value flexibility, manage uncertainty, and deliver reliable energy in a profoundly different system. 

The Australian Energy Council’s Energy2050 vision makes this explicit. By mid‑century, the National Electricity Market (NEM) will no longer be defined by dispatchable coal fleets and predictable demand profiles. Instead, it will be shaped by dynamic and flexible energy markets- the critical enabler of a secure, affordable and decarbonised power system.  

The shift is not incremental. It is structural. 

For decades, the wholesale market has been built around large, synchronous generators delivering stable energy output. That model is ending. 

By 2050: 

• Coal exits the system entirely. 
• Variable renewable energy dominates generation, with tens of gigawatts of solar and wind capacity.  
• Storage, firming capacity, and flexible gas play essential balancing roles.  
• Around one‑third of supply is expected to come from behind‑the‑meter resources.  

In this environment, the traditional concept of “energy” as the central traded commodity becomes insufficient. The future market is not just about producing megawatt-hours- it is about managing variability in real time. 

Below we outline the dynamics at play. Those dynamics are also the central theme and focus of the AEC Conference 2026 on 4 June. The conference in Sydney will draw together leading voices such as Tim Nelson, chair of the NEM review panel, Erin van Maanan, Executive GM Strategy at Hydro Tasmania, Andrew Richards, head of the Energy Users Association of Australia, and Matt Brine, Deputy Secretary of the Energy Group in the Federal Department of Climate Change, Energy, the Environment and Water, to discuss system complexity, the coordination challenge, how to balance stakeholder interests, as well as considering risk allocation and investor behaviour in this changing energy system. 

Flexibility Becomes the Core Market Product 

The defining feature of the future system is variability - solar peaks during the day, wind fluctuates unpredictably, and demand becomes more dynamic with electrification. 

To manage this, the Energy2050 framework points to a system where flexibility is delivered through multiple mechanisms: 

• Short-duration storage to manage hourly imbalances 
• Long-duration storage for multi-day and seasonal variability 
• Gas-fired generation as a backstop during “renewable droughts”  
• Demand response and consumer flexibility integrated into system operations 

Markets must evolve to reward these capabilities - not just energy output. 

Critically, the report highlights that “there will continue to be an important role for a spot market,” but its interaction with secondary contract markets becomes far more important. These contract markets must be: 

• Deep and liquid. 
• Able to hedge intra-day and seasonal volatility. 
• Structured around new products reflecting flexible supply and demand. 
• This is a significant departure from today’s relatively standardised hedging instruments. 

Solving the “Missing Money” Problem 

One of the most acute challenges identified is the gap between what flexible resources earn and what they require to be financially viable -the so‑called “missing money” problem.  

In a high-renewables system: 

• Prices can be volatile but suppressed on average 
• Firming assets run infrequently but are essential when needed 
• Market revenues alone may not support required investment 

As a result, the transition is likely to involve: 

• Out-of-market support mechanisms (e.g. capacity-style arrangements) 
• New policy instruments such as the proposed Electricity Services Entry Mechanism (ESEM) 
• Temporary “make-whole” payments to ensure investment occurs at pace  

However, this introduces a second challenge: how to exit from intervention.  The report is explicit that long-term market design must accommodate this legacy without distorting future investment or dispatch decisions. 

The end state is clear: a fully functioning market capable of standing on its own, once the transition phase is complete. 

Integrating Consumer Energy Resources into Wholesale Markets 

Perhaps the most profound shift is the increasing role of consumers. 

By 2050: 

• Rooftop solar and batteries will account for a large share of capacity. 
• Consumers will participate either directly or via aggregation. 
• Behind‑the‑meter resources will need to be visible, schedulable, and integrated into wholesale markets. 

This requires a fundamental redesign of market participation: 

• Aggregation models to coordinate distributed resources 
• Improved data visibility and market interfaces 
• New products enabling consumers to capture value while supporting system needs 

The system moves from one where consumers are passive price-takers to one where they become active providers of flexibility. 

System Security: From Physics to Markets 

A second structural shift is in system security.  Historically, security services (inertia, system strength, frequency control) were provided as a by-product of thermal generation. That is no longer viable.  The future system will depend on: 

• Explicitly defined and valued essential system services (ESS) 
• Increasing reliance on inverter-based technologies 
• Markets or procurement frameworks that deliver investment signals for these services. 

The solution lies in clear service definitions, competitive procurement, and co‑optimisation with energy markets. 

Transmission as the Physical Enabler of Market Outcomes 

Markets cannot function without infrastructure. 

The Energy2050 framework highlights that the transition depends on: 

• Large-scale expansion of transmission 
• Development of Renewable Energy Zones (REZs) 
• Improved planning and delivery processes. 

Delays could materially increase consumer energy costs if not addressed. Efficient markets require not just the right design—but the right physical system to operate within. 

Market Design Principles for the Transition 

Across all elements, the Energy 2050 report converges on a set of guiding principles for future market design: 

• Effective competition 
• Technology neutrality 
• Well-defined service specifications 
• Liquid secondary markets 
• Transparent investment timelines 
• Limited, well-targeted intervention. 

These principles reflect a desire to balance two competing objectives: 

1. Enabling rapid investment during the transition 

2. Preserving long-term market efficiency and integrity. 

Getting that balance right will determine whether Australia achieves an orderly transition—or a disorderly one with higher costs and greater intervention. 

Markets as the Backbone of the Energy Transition 

The Energy2050 vision reframes the transition. It is not simply about deploying more renewables. It is about building a market system capable of operating in a radically different physical reality. 

In that future: 

• Flexibility replaces baseload as the dominant paradigm 
• Consumers become participants 
• Contracts become more complex and more important 
• Markets must coexist with - but ultimately outgrow - transitional policy support. 

The success of the transition will hinge on whether markets can evolve fast enough to keep up with technology and policy ambition. 

Because in the end, the energy system of 2050 will not just be cleaner. 

It will be more dynamic, more decentralised- and fundamentally more market-driven than ever before. 

The AEC Conference 2026  

The Australian Energy Council Conference 2026 has been designed to bring together senior leaders across the energy sector to advance shared understanding of the challenges and opportunities shaping Australia’s path to Energy2050. The Conference aims to foster informed, practical and forward‑looking discussion on how policy, markets, technology and customer outcomes must evolve over the coming decades- while maintaining a strong focus on what can realistically be delivered in the next five years.  

The AEC has put a stake in the ground with Energy2050.  I am looking forward to engaging with a broad range of stakeholders to discuss this in more detail and encourage people to register to come along. You can register here.