From visibility reforms to the ESEM, the Nelson Review puts contracts at the centre of the NEM’s future. We explore the implications for liquidity, risk allocation, and the bankability of new investment.
The Tim Nelson-chaired Review of the NEM ('Nelson Review') has become a focal point of discussion across the energy sector.
While earlier NEM reviews have often concentrated on spot market design and operational reliability, the Nelson Review places greater weight on the contracts market - swaps, caps, power purchase agreements (PPAs), and emerging structures such as battery tolling agreements - alongside broader reforms on resource visibility, reliability, and governance.
Much commentary to date has focused on governance and reliability. These are important themes but, for developers, they are not the issues that will determine which projects get financed.
The more pressing commercial question is how developers can obtain financeable (“bankable”) offtakes given two contexts:
As advisors working directly with developers on the design of bankable renewable and storage contracts, we see the importance of offtake bankability for financing projects and, ultimately, advancing Australia’s decarbonisation.
We also see the implications of the Nelson Review for bankability and liquidity of offtakes. For corporates and retailers, these reforms may eventually shift procurement tools, but the immediate weight of impact falls on developers and asset operators.
These recommendations represent continuity more so than disruption. No material change to the market framework is proposed, other than incorporating new categories of participants such as Virtual Power Plant (VPP) aggregators and demand response providers.
The panel’s intent is clear, to improve liquidity by pushing participants toward contracts that can be more easily traded across the market. But fungibility is easier to describe than to achieve. There is also a trade-off between fungibility and bankability, especially for variable renewables like wind and solar.
A few years ago, CORE Markets introduced solar and wind shapes, which had pre-determined generation profiles. Our solar shape was a NEM-wide monthly product, meaning the underlying generation profile was the same across all mainland NEM regions for each day of a given month, and then varied from one month to the next.
This structure aimed to balance liquidity and bankability:
However, our experience brokering and trading the solar shape reveals a relatively one-sided market - with far more sellers than buyers (as covered further below).
While market participants appreciated the greater standardisation of a solar shape product vs. a run-of-meter solar PPA, the solar shape was still not bankable: lenders, and ultimately project developers, continued to prefer run-of-meter contracts
This experience revealed fungibility is difficult when resources’ generation profiles vary significantly within and across regions. And solar output is more correlated across regions than wind – making a “standard” wind shape product even less bankable.
All this experience suggests it will be difficult for the industry to develop fungible and bankable contracts for solar and for wind which is at the heart of the MMO’s consideration of fungible contracts for “zero emissions bulk energy” provision.
In addition to contract design, industry pushback is likely, particularly over features such as bid-ask spread limits and uncompensated costs for market-making, which could constrain market makers and lead to unintended liquidity distortions.
That said, the drive for fungibility is likely to spur innovation in contract structures.
In CORE Markets’ experience, striving for fungibility with respect to time of day is likely to be more fruitful than with respect to generation profile. The core of any contract – whether a swap, cap or run-of-meter contract – is an hourly 1MW ‘flat’ shape. These time-of-day products are easier to standardise and match against demand.
And the growing hybridisation of projects – coupling BESS with solar and, increasingly, also with wind – make it easier for such projects to defend time-of-day contracts than standalone solar or wind.
Therefore, the Nelson Review’s drive for greater fungibility, with the attendant impacts on contract innovation, should be welcomed.
CORE Markets has already seen progress in making renewable contracts more fungible than the traditional run-of-meter contract. As mentioned, in 2019 we developed products that allowed solar and wind projects to move closer to standardisation, while still reflecting the characteristics of their generation profiles.
Proxy revenue swaps also offer greater fungibility than run-of-meter structures, and these have gained some traction in recent years.
Similar innovation is occurring in storage.
New structures such as “Heads & Tails” contracts and “Super Peak” swaps (with super peaks defined, for example, as a two-hour morning peak and a four-hour evening peak) have created ways to standardise storage value while still reflecting operational realities.
These examples show that contract design can evolve to meet the market’s need for liquidity and risk transfer without relying solely on bespoke arrangements.
For developers, these innovations show that standardisation need not mean one-size-fits-all - bankability can be achieved while retaining alignment with asset characteristics.
These lessons are critical context for the Nelson Review’s proposed long-term reforms, particularly the Electricity Services Entry Mechanism (ESEM).
The competitiveness of later-stage projects has already been observed under the Capacity Investment Scheme (CIS) – reflecting the trumping of merit criteria over eligibility criteria.
The ESEM’s design will similarly tilt toward projects that have already secured offtakes, while offering less certainty for those still at early stages. In this way, the ESEM’s de facto merit criteria will be financial value, rather than the various non-financial value criteria under the CIS including social licence and First Nations commitments.
The effectiveness of the ESEM will depend heavily on the success (or otherwise) of the above-noted reforms to make standardised and fungible contracts for wind and solar projects. Without that foundation, ESEM auctions risk limited uptake with attendant poor price discovery and limited impact on enabling new projects to enter the market.
This said, the ESEM may provide greater price transparency than the CIS in two important ways:
ESEM governance arrangements and cost-recovery mechanisms remain to be resolved, though precedents can be drawn from CIS and LTESA mechanisms. We expect the ESEM to benefit offtakers / contract buyers, and ultimately consumers, more so than potentially has been the case under the CIS and LTESA, for the following reasons:
The Nelson Review makes clear that Australia’s energy transition will be shaped less by changes to the spot market and more by the evolution of contract markets.
The introduction of fungible contracts under the MMO – and longer-tenor contracting through the ESEM – will define how liquidity, bankability, and risk allocation evolve.
For developers and buyers, the question now is how to position. That means stress-testing procurement and offtake strategies against evolving contract designs and exploring bespoke structures that can balance liquidity with bankability.
CORE Markets works with project developers and other market participants to structure innovative contracts suited to shifting market conditions. Get in touch to see how we can help.
CORE Markets provides analysis and tools to help market participants navigate market reforms and developements with confidence:
Contracts, liquidity and risk: The NEM Review through a commercial lens
