The NEM’s Draft Reform Blueprint: An Evolution, Not a Revolution
The draft report into the future of the National Electricity Market (NEM),(1) released by a panel led by economist Tim Nelson, may not have sparked headlines, but investors should take notice. At the heart of this 250-page document lies a simple truth: the NEM is not broken, but it does need improving. And what’s on the table is not a radical overhaul, but a practical path forward that strengthens market confidence — especially during what the panel calls the “tenor gap” period, which is a period between years 5 and 20, when risks are highest.
“What we’re proposing is an evolution… not a revolution,” Nelson said in a subsequent webinar announcing the report. It’s a sentiment worth remembering for anyone hoping for a dramatic reset. But the real message — for investors — is that the future of energy markets will reward those who understand how risk is being managed across the short, medium and long term, and more importantly, how they can then price for it.
What the Report Is
The report is the result of a six-month review of the wholesale market settings that underpin the NEM. The panel – which includes Nelson, former AER chair Paula Conboy, energy adviser Ava Hancock and former Boston Consulting consultant Phil Hirschhorn – was tasked with recommending a framework for investment certainty after the expiry of the federal Capacity Investment Scheme in 2027.
The core concern? How to ensure Australia’s electricity market can attract private capital into renewable generation and storage, while we phase out coal. Investors, governments and regulators all agree the transition must be orderly. The problem is, the current market structure doesn’t send the long-term signals that developers and capital providers need.
What’s Being Recommended
There are nine main recommendations, but three stand out as especially important for investors:
The Spot Market Stays
The NEM’s real-time, energy-only spot market will remain the bedrock of the system. Rather than adopting a capacity market — where generators are paid to be available — the panel wants to preserve sharp price signals that reward efficient dispatch. That may disappoint some market players lobbying for new guaranteed revenue streams. But for many, it’s a vote of confidence in the existing system — just modernised to reflect a grid that’s less coal-fired and more solar-and-battery-driven.Visibility and Participation of Distributed Energy
The report calls for a broader range of price-responsive resources — think household batteries, electric vehicles, industrial demand flexibility — to be visible and active in the market. Right now, millions of these so-called “hidden participants” are outside AEMO’s line of sight, distorting demand forecasts and adding costs. According to the report, bringing them into the dispatch process will improve transparency and reduce system costs.A New Investment Signal – the Electricity Services Entry Mechanism (ESEM)
Perhaps the most significant recommendation is the creation of the ESEM. Through this mechanism, AEMO Services would run tenders for long-term, standardised contracts — covering bulk energy, shaping and firming. These contracts would then be sold back into the market in future years. It’s an elegant way to address the “tenor gap” — the mismatch between the short-term nature of energy contracts and the long asset lives of renewable and storage projects.
Giles Parkinson from Renew Economy called the ESEM “the most striking and substantial” part of the review (3). He’s right. By embedding this mechanism into the market framework, the panel hopes to create an enduring signal that can unlock long-term capital at scale.
Why This Report Matters for Investors
There are three key reasons why this report is good news.
Risk Can Be Managed
With spot markets becoming more volatile due to the variability of renewables, the need for functional derivatives markets has never been higher. The panel’s recommendations, including the “always-on” market making obligation for standardised contracts (4), aim to improve liquidity and transparency — especially for smaller retailers and new entrants. For investors, this means better visibility and tools to hedge against price swings.Long-Term Certainty in an Uncertain Market
Without the ESEM or something like it, long-dated capital-intensive projects (especially pumped hydro, batteries and firming assets) would continue to struggle to get financed. The beauty of the proposed structure is that it blends public facilitation with private discipline. The standardised contracts will be technology-neutral, tradeable, and transparent — and as they’re sold back into the market, they’ll feed liquidity into the derivatives space.It Supports Innovation, Not Just Incumbents
Importantly, the framework enables participation from both supply and demand – from big infrastructure providers to a small business installing smart energy systems. As the report notes, visibility of price-responsive assets will allow the grid to better manage the peaks and troughs — and unlock revenue opportunities for players that previously sat outside the market’s economic loop.
Not Everyone’s a Winner
Those hoping for a bold reset — such as a capacity market, locational marginal pricing, or physical ahead markets — will be disappointed. Nelson himself acknowledged this , noting the importance of sticking with what works, and avoiding disruption for disruption’s sake.
Also, the report does not promise to remove political risk altogether. Implementation of these recommendations will depend on agreement from state and federal energy ministers, changes to the National Electricity Law, and buy-in from industry players. Some ideas, such as reform of market bidding practices and improved battery visibility, are still early-stage. And the final shape of the ESEM will need to be designed collaboratively with the sector.
Next Steps
The draft report is just that — a draft. Feedback is now being sought from stakeholders across the energy and investment landscape, with a final report due by the end of the year. That gives the industry a chance to shape the details, but also a responsibility to engage constructively. The panel has shown its hand. Now it’s over to the market.
The Bottom Line
The NEM draft report isn’t revolutionary, but it is meaningful. It represents a maturing of policy thinking — away from ad hoc intervention and toward a market-based framework that respects investor needs. By embedding long-term contracting into the law via the ESEM, improving transparency in the derivatives market, and making distributed energy count, this package is a clear win for investors. If implemented, it would help close the tenor gap, reduce risk premiums, and accelerate investment in the transition — exactly what the market needs.
References
1 Nelson T, Hancock A, Conboy P, and Hirschhorn P, National Electricity Market Wholesale Market Settings Review – Draft Report, 6 August 2025. https://www.dcceew.gov.au/energy/markets/nem-wms-review
2.. Cropp R, Australian Financial Review, “Radical scheme proposed to reinvent the energy market”, 6 August 2025. https://www.afr.com/policy/energy-and-climate/review-proposes-radical-plan-to-reinvent-the-energy-market-20250805-p5mkma
3. Parkinson, G Renew Economy, “Physical world has changed, the contract world needs to catch up,” 6 August 2025. https://reneweconomy.com.au/physical-world-has-changed-the-contract-world-needs-to-catch-up-nelson-unveils-draft-market-reform/
4. Potter B, The Energy “Big Power faces mew obligations, market share guardrails ” 6 August 2025. https://theenergy.co/article/big-power-faces-new-obligations-market-share-guardrails
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