NEM Expert Review: Key areas and direction come into sharper focus

The National Electricity Market (NEM) Review Expert Panel is currently conducting public forums.  The Australian Energy Council attended the Sydney forum, where the Panel shared insights gathered from market participants through submissions and bilateral discussions, and presented indicative directions for feedback. The strong attendance at the Sydney forum indicates the importance attached to the review within the energy sector. 

With further forums planned through to early June, we take a look at what we learnt, what happens next and what we see as the key areas for focus. 

Expert Panel direction 

During the forum, the Panel outlined a high-level architecture for a new mechanism intended to facilitate the entry of new energy services into the market, noting the thinking is indicative at this stage, and the Panel is keen to continue to engage. Key attributes of this proposed mechanism include: 

• A hybrid structure combining centralised and decentralised elements into a unified NEM-wide framework, potentially drawing from existing mechanisms. 

• A focus on attracting new investment in a manner that ensures competitively neutral pricing relative to incumbent participants. 

• An approach to addressing the "tenor gap" between retailers of energy (who may want to purchase for say, two years) and suppliers of energy (who require longer term commitments to get an investment financed and approved).  The intervention would focus on supporting projects during their later operational years, allowing existing market arrangements to link buyers and sellers in the front end of the projects, and only intervene where necessary. 

• Utilisation of standardised and fungible contracts that can be returned to the market. This method of policy support is envisioned to encourage, rather than detract from, retail competition. These contracts would be progressively resold into the market to boost liquidity and aid long-term price discovery.  The contracts will be highly comparable across different projects regardless of the specific plant technology. 

• A focus on the services provided rather than specific technologies. The core services identified for support by a new entry mechanism are bulk, zero-emissions energy, shaping (matching intraday and interday supply and demand profiles for regular peaks), and firming (very long duration, dispatchable resources that can be delivered as needed). 

• The mechanism is intended to include demand-side resources and aggregated small-scale resources, such as flexible demand, aggregated rooftop solar, home batteries, or community batteries, provided they are voluntarily scheduled. 

• Support for the delivery of Essential System Services (ESS) by coordinating and facilitating investment in new ESS providers. The bulk energy, shaping and firming services supported by the new mechanism are likely to include technologies that support frequency response, voltage control and inertia as a by-product of electricity generation.  Some providers of services do not naturally provide ESS, but could provide ESS with some augmentation (eg. Investment in clutches, fly wheels, grid forming inverters) 

The Panel also discussed considerations for promoting market liquidity. They aim to enhance and lengthen price discovery, viewing liquid derivatives traded on public exchanges as valuable tools for market participants to establish fair value. Better promoting market liquidity will ensure that smaller, specialised retailers maintain options for trading and hedging as the energy transition progresses. 

Regarding the short-term spot market, the Panel noted that it currently operates effectively at dispatching electricity in operational timeframes and should be retained. However, they suggested that more participants should be encouraged to become visible and that some evolution may be necessary to ensure the spot market remains fit for purpose and better aligned with medium and long-term pricing signals. Specific areas for potential consideration include market bodies developing responses to 'excessive' or algorithmic bidding and the Reliability Panel taking a longer-term view when setting operational parameters like the market price cap and cumulative price threshold. 

What happens absent reform? 

Without reform, the Panel foresees potential challenges across different market timeframes: in short-term spot markets with invisible participants and inefficient prices; in medium-term derivative markets with outdated, illiquid products and unstable, unclear prices; and in long-term investment markets characterized by uncertainty and insufficient investment. 

The proposed reforms are designed with specific goals for each market segment: 

• For short-term spot markets: achieving revenue sufficiency, accurate signals, and efficient prices. 

• For medium-term derivative markets: improving risk management and fostering stable, transparent prices. 

• For long-term investment markets: driving new investment and ensuring reliable supply. 

Focus areas for market participant feedback 

Towards the conclusion of the forum, the Panel posed several important questions to market participants: 

• Short term spot markets  - How could more participants be encouraged to become visible to, or dispatched by AEMO?  What ‘wrinkles’ are most important to address to keep the spot market dispatching as efficiently as possible? 

• Medium term derivative markets – how could liquidity be best supported? 

• Long-term investment markets – Panel questions covered which part of a project's life span requires support, what kind of fungible, standardised contracts could underpin a new mechanism, whether bulk energy, shaping, and firming are the appropriate services to support, how to make the mechanism accessible to small resources and the demand side, and which entities are best placed to determine investment needs and administer the mechanism.  

• Finally, concerning implications for networks and retail, the Panel inquired about aligning network and wholesale signals and how retailers could offer customers longer-term contracts. 

What comes next? 

The Expert Panel is conducting Public Forums in each NEM State over the course of May with an online session in early June.  The next stage of the Review will be the release of the Panel’s Draft Report in July.   The AEC and its members will continue to engage with the Panel.   

We think the Panel has done an excellent job with coming up with a high-level architecture and are keen to help flesh out some of the detail of how the mechanisms would work.  In particular, using a services-based approach, independent of specific plant, allows for innovation over the medium and long term, and harnessing market mechanisms to focus on delivering the services required rather than relying on picking technology winners. 

Key areas of focus

Key areas of focus for the AEC are likely to be:

• how best to ensure the firming contracts drive efficient investment at least cost to consumers. Ensuring the mechanism is open to existing providers of the firming service (subject to any emissions / operating requirements being satisfied) would ensure gas powered generation is retained in the system as long as is economically efficient.  This would reduce the scale and scope of new investment required, reduce the risk of disorderly exit, likely reduce overall system costs and be consistent with the principle of efficient use of existing infrastructure.
• ensuring there is a mechanism to support the provision of the required essential system security services. 

We are also keen to understand the next level of detail more generally and help drive an industry-wide alignment to support the recommendations proposed and reform the NEM.