Australia | Publication | August 2025
This article was co-authored with Jack Brown.
The National Electricity Market (NEM) has been closely examined in two recent government commissioned reviews:
Themes across both reviews identify hedging product variety and liquidity as fundamental to a well-functioning power supply chain through the energy transition. This commonality provides the policy underpinning for the PEMM Act prohibitions to offer some shorter term guardrails while the medium- and long-term changes suggested in the draft NEM Review report take shape.
In November 2024, the Australian Government announced an independent review of the NEM wholesale market settings to promote investment in firmed, renewable generation and storage capacity in the NEM following the conclusion of Capacity Investment Scheme (CIS) tenders in 2027.
The NEM Review is being conducted by a panel chaired by Associate Professor Tim Nelson and their draft report (Draft Report) was released on 6 August 2025,1 with public submissions open until 17 September 2025.2 The final report and implementation roadmap is expected to be released later this year.
The Draft Report accepts the inherent characteristics of the NEM’s original framework and makes recommendations aimed at addressing the shortcomings made acute by Australia’s energy transition.
The Draft Report expresses concern over the impact of ‘hidden participants’ that are not scheduled and not visible to the Australian Energy Market Operator and market participants in real time. It is recommended that price-responsive and consumer energy resources be registered as more active participants, making them visible to other market players, and potentially, participate in price formation.
The Draft Report also suggests some targeted reforms to ensure the spot market can continue to operate securely and reliably.
The Draft Report emphasises the importance of the derivative markets to manage price risk, and to this end, notes that there has been some encouraging innovation and evolution in the design of hedging contracts. Nevertheless, the Draft Report recommends developing a new, always-on, ‘market making obligation’ (MMO) enshrined in the National Electricity Law or National Electricity Rules. It would mandate a ‘small’ number of key derivative contracts be made available in each NEM region, with contract types determined through a co-design process involving the AER and industry.
At this stage, three types of contracts have been identified as potentially worthy of inclusion in the MMO:
This MMO reform is proposed to be complemented by an extension of the Medium-Term Projected Assessment of System Adequacy’s generation availability projections to ensure sufficient market information is available to support longer term liquidity and price discovery.
The Draft Report identifies:
as long-term issues in the NEM require resolution.
In answer, the Draft Report recommends the creation of an Electricity Services Entry Mechanism (ESEM), an underwriting mechanism to succeed the CIS. It seeks to improve contract liquidity by providing revenue contracts for the later years of a project’s financed life and by utilising the financial derivatives mandated by the MMO (and then returning them to the market).
The Draft Report also notes that existing regulatory settings will need to be aligned with the ESEM if it is to be successful.
The PEMM Act was introduced five years ago to address perceived imbalances in bargaining power and transparency, and vertical integration concerns in the power sector (see our earlier article on the PEMM Act - here). In accordance with its terms, the PEMM Act has been subject to an effectiveness review, conducted by the Department of Climate Change, Energy, the Environment and Water (DCCEEW). The final report (PEMM Report)3 concludes that the PEMM Act should not sunset at the end of this year.
Whilst the PEMM Report notes a lack of data and difficulties in isolating the impact of the PEMM, the provisions were found to be sufficiently effective to justify their retention until the wholesale and retail markets reach a steadier state.
The retail pricing provision requires an energy retailer to make reasonable adjustments to retail prices for small customers to reflect sustained and substantial reductions in its underlying costs of producing electricity.
DCCEEW see value in retaining this provision as it will likely continue to constrain retailers by requiring them to track movements in underlying costs and ensure they have policies and procedures in place to ensure that there are not profit windfalls to retailers at the expense of small customers. There would appear to be an enduring concern that many customers pay a ‘loyalty penalty’ when they do not switch retailers, amplified by concerns that retail competition is lacking.
The financial contract market provision prohibits a generator from failing to offer, or offering in a restrictive manner, financial contracts for the purpose of substantially lessening competition.
Considering the thinness of availability of certain hedges, also identified in the NEM Review, retention of the financial contract market provision has been recommended. The PEMM Report draws out the contracting order remedy as a noteworthy deterrent, which if removed, may increase the incentives for generators to contravene the provision and decrease financial market liquidity.
The electricity spot market provisions prohibit bids that are fraudulent, dishonest, made in bad faith or for the purpose of distorting or manipulating prices.
The PEMM Report found value in remaking these provisions as spot market price volatility will continue. Scrutiny over bidding behaviour is seen a vital to minimise the impact of high-price events. The PEMM report did, however, recommend doing away with forced divestitures and exploring how the provisions could be expanded to address cross-market interactions.
The NEM and PEMM Reviews acknowledge key aspects of the transition which appear to lock in certain trends:
The NEM Review affirms the existing structure of spot market, noting that sharpening price signals “are not inherently problematic if tools exist to respond to those signals or to manage risks”. This statement underscores the importance of the medium-term, derivative-related reforms. The effective operation of the electricity spot market is predicated on a functional derivatives market, particularly in the context of a less predictable, weather-dependant energy system. Similarly, the long-term ESEM solution relies on the financial derivatives mandated by the MMO to secure its contract offering.
As a piece of acute sectoral regulation that overlaps with existing provisions in competition law, consumer law, the National Electricity Rules and the National Energy Retail Rules, it is not surprising that the PEMM Review identified only speculative and anecdotal evidence as to the effectiveness of the PEMM Act. Nonetheless, given the immediate market issues identified by both reviews, one can comprehend the reluctance of DCCEEW to allow the legislation to sunset.
The NEM Review foreshadows greater industry participation in shaping the MMO, which will (as currently conceived) apply to select participants above a pre-defined size and prescribe volumes that must be made available for trading and a limit on the bid–ask spread.
If implemented, we expect these thresholds to be heavily debated and scrutinised by market participants, each of whom have a unique risk position. Government will also need to be cautious not to stifle existing innovation in the hedging market through its MMO specifications.
The NEM Review does not have within its terms of reference, the object of reducing carbon emissions. This is illustrated through the Draft Report’s commentary on the Renewable Energy Target (RET). It notes that whilst the RET was effective in substituting coal-based energy with renewable-based energy, it did not address other services consumers need (such as shaping, firming and essential system services).
The NEM Review seeks to address these market services and is technology neutral. Accordingly, it will be interesting to see if the Government overlays or in-builds any policy positions in implementing recommendations of the NEM Review.
Please stay tuned for further updates and, in the meantime, get in touch.
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