What's in the NEM Wholesale Market Settings Review Draft Report?

What you need to know

• The NEM Wholesale Market Settings Review draft report makes 9 recommendations to support investment in firmed renewable generation and storage capacity following the conclusion of Capacity Investment Scheme in 2027. The recommended reforms will be refined in consultation with the industry and relevant stakeholders, and will involve short, medium and long term measures.
• Short term: measures aimed at increasing visibility of consumer energy resources including by imposing new obligations on aggregators related to participation in the wholesale market.
• Medium term: introduction of an always-on market making obligation (MMO), which will apply to all market participants above a pre-defined size and prescribe volumes that must be made available for trading and a limit on the bid–ask spread. Contract types will be co-designed by the AER and industry to reflect evolving market needs.
• Long term: introduction of an Electricity Services Entry Mechanism (ESEM) within the National Electricity Law (NEL) to facilitate investment in bulk energy, shaping, and firming services. The ESEM will provide standardised, fungible contracts for the later years of a project’s life (post 7 years) – aimed at addressing the 'tenure gap' risk for projects. Project developers would sell these contracts to a central buyer which would sell back these contracts to the market (retailers and C&I users). The aim is to ensure that the bulk energy, shaping and firming is available to market participants to manage energy market risk.

What you need to do

• The NEM Review Panel is inviting stakeholders to participate in the consultation process, making submissions here.
• Consultation closes on 17 September 2025.

The NEM Review

In November 2024, the Australian Government announced its Wholesale Market Settings Review, tasking an independent expert panel (Panel) with recommending changes to the National Electricity Market (NEM) wholesale market settings to promote investment in firmed, renewable generation and storage capacity in the NEM following the conclusion of Capacity Investment Scheme tenders in 2027.

On 6 August 2025, the Panel released a draft report as part of its Wholesale Market Settings Review.

The draft report finds that while the NEM's core market mechanisms remain broadly effective, mounting pressures from increased weather dependency, energy constraints, and the rapid uptake of distributed or consumer energy resources (CER) require coordinated, forward-looking reform. The draft report makes recommendations intended to link the short, medium and long term markets and provide a means for integrating medium-term risk management with efficient spot market operation and explicitly link these with a long term investment signal embedded within the NEL.

Key themes

The draft report identifies two key challenges impacting the operation of the NEM:

• (weather dependent and energy constrained): variable renewable energy (VRE) generators are inherently weather dependent, introducing greater day-to-day and seasonal variability in supply. The growing reliance on weather-dependent VRE resources is increasing the risk of periods where the market is energy constrained; and
• (less scheduled and less dispatchable): the market is being shaped by the expanded participation of CER. New, small-scale, price-responsive generators (ie. batteries) are expected to enter the market. Without reform to make these resources more ‘scheduled’ and observable to the market operator and market participants, the market may not be able to function without significant over-investment.

The Panel suggests these challenges are manifesting in four central themes across the short-, medium- and long-term operation of the NEM:

• (emerging operational pressures): the market continues to function efficiently at an operational level, however, the rise of VRE and hidden, price-responsive CER is creating a structural change in the dynamics of the market. Prices are becoming predictably more variable (eg. through the predicable daily rise and fall of solar output or seasonal wind patterns) and unpredictably more volatile (eg. through the sudden, unpanned withdrawal of capacity during outages);
• (liquidity and access challenges): the derivatives market, essential for risk management and investment, is under strain due to declining contract liquidity. Traditional hedging instruments are likely to become less available as thermal generators (which have historically underpinned supply of baseload swaps) exit the market;
• (structural barriers to long-term investment): there is a persistent ‘tenor gap’ between the long-term contracts needed to finance capital-intensive assets (generally 10 to 30 years) and the shorter-term appetite of buyers (typically 3 to 7 years), impeding investment in firmed renewables and storage; and
• (consumer outcomes): the generation mix becoming more weather-dependent and energy constrained exposes consumers to greater price variability and complexity, underscoring the need for simple, stable retail offerings and robust consumer protections.

Notably, the Panel's terms of reference excluded consideration of fuel markets, carbon markets, and planning assessment reform. The draft report also does not consider any reforms relating to the grid connection process/requirements under the National Electricity Rules (NER), the Commonwealth Government's Capacity Investment Scheme (CIS), the NSW Government's Long-Term Energy Services Agreement (LTESA) scheme, the Commonwealth Government's offshore wind framework, the various State renewable energy zone (REZ) frameworks, or Commonwealth and State renewable energy targets. These markets, schemes and frameworks remain a fundamental part of the development works required to support, and investment case for, new energy generation and storage projects in the NEM.

Recommendations

The Panel's recommendations seek to work together across the following three key horizons to uphold the foundational features of a well-functioning electricity market (ie. efficient pricing, effective risk management and reliable supply):

• (short-term): the spot market, where electricity is priced in five minute increments.
• (medium-term): the derivatives market where participants use financial contracts to hedge against the risks of fluctuating spot market prices.
• (long-term): investment in new generation and storage, requiring predictable revenue streams over extended periods.

The Panel makes 9 recommendations aimed at improving operational visibility in the short-term spot market, strengthening liquidity of the derivatives market and providing long-term investment signals that utilise the derivatives market and engage the targeted procurement of essential services that the market is not well placed to provide:

1. Retain the energy-only spot market: Maintain the real-time regional energy-only spot market as the core mechanism for efficient dispatch and price formation. The Panel recommended against introducing capacity markets (like the WEM), locational marginal pricing, or distribution-level wholesale markets.
2. Enhance visibility and dispatchability of price-responsive resources: Energy Ministers should require a broader range of price-responsive resources (CER, batteries and large loads) to be visible or dispatchable in the market by 2030, leveraging the Integrating Price Responsive Resources (IPRR) framework. Establish thresholds and pathways for participation, with obligations falling on aggregators and retailers rather than individual consumers.
3. Facilitate CER participation: Governments should focus reforms and incentives on enabling CER to participate in the market, ensuring robust consumer protections, and targeting incentives towards resources that are market-ready and capable of dynamic network connection.
4. Incremental spot market reforms: Market bodies and the Australian Competition and Consumer Commission should introduce incremental reforms to address risks from excessive and algorithmic bidding, improve visibility of battery state of charge, and minimise the impact of transmission outages on spot prices.
5. Review market price settings: The Reliability Panel should consider adjusting market price settings (market price cap, market price floor, cumulative price threshold and administered price cap) to provide a longer-term outlook (up to 15 years) on their intended form to support long-term contracting.
6. Mandatory market making obligation: The Panel proposes a significant reform with the introduction of a mandatory, always-on market making obligation (MMO). Unlike the current Market Liquidity Obligation (MLO), which is only triggered in specific circumstances, the MMO will require all market participants above a prescribed size to continuously offer standardised contracts for trading, with rules on volumes and bid-ask spreads. Contract types will be based on a standardised set, co-designed and regularly updated (e.g. every two years) by the AER and industry to reflect evolving market needs. The MMO would be introduced via an amendment to the National Electricity Law (NEL) and NER.
7. Extend Market information: Extend market information by lengthening the medium-term projected assessment of system adequacy (MT PASA) from three to five years to support longer-term price discovery and risk management.
8. Electricity Services Entry Mechanism: The Panel recommends establishing an Electricity Services Entry Mechanism (ESEM) within the NEL to address the ‘tenor gap’ and facilitate investment in bulk energy, shaping, and firming services. Under this model, a central scheme vehicle (similar to that used for New South Wales' LTESAs, being the Scheme Financial Vehicle) will contract with new projects for the later years of their life (post 7 years) and then progressively sell these contracts back into the market as demand arises.
9. Align Regulatory and policy settings: Governments and market bodies in the NEM should pursue coordinated reforms to ensure regulatory settings, innovation, and existing programs are aligned with the ESEM. Clarify emissions targets for firming services, accelerate zero-emissions firming technology development, and review interconnector hedging arrangements.

Next Steps

The Panel is seeking further feedback from stakeholders on the draft recommendations before issuing its final report and implementation roadmap by late 2025.

Stakeholders are encouraged to participate in the consultation process, making submissions here. Consultation closes on 17 September 2025.

Following the final report, legislative and rule changes will be progressed through the Energy and Climate Change Ministerial Council, with staged implementation anticipated from 2026 onwards.

Other Authors: Paul Newman, Consultant; Odette Adams, Counsel; Tristan Shepherd, Senior Associate; Robert Gough, Senior Associate; Murray Rissik, Lawyer and Savannah Tindiglia, Graduate.

Want to know more?

• Australian electricity and gas markets – July 2025 Update 
• Powering Change: A new era for the energy transition
• Nearing Net Zero