What's in the NEM Wholesale Market Settings Review Final Report and how different is it from the Draft Report?

What you need to know

• The NEM Wholesale Market Settings Review final NEM Review report makes 12 recommendations to support investment in firmed renewable generation and storage capacity following the conclusion of the Capacity Investment Scheme in 2027. The recommended reforms will be implemented under the National Electricity Law (NEL) during the course of 2026.
• These include:
  • Short term: measures aimed at increasing visibility of consumer energy resources including by imposing new obligations on aggregated generation or load related to visibility in the wholesale market;
  • Medium term: introduction of a permanent market making obligation (MMO), which will apply on a region by region basis and provide for contracts to be made available for trading and a limit on the bid–ask spread. Contract types will be co-designed by industry and government bodies to reflect evolving market needs; and
  • Long term: introduction of an Electricity Services Entry Mechanism (ESEM) 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 a minimum of 3 years) – aimed at addressing the 'tenor gap' risk for projects. Project developers would enter these contracts with a central buyer (the ESEM Administrator) who will sell back these contracts to the market (retailers and C&I users). The aim is to ensure that bulk energy, shaping and firming is available to market participants to manage energy market risk.

What you need to do

Throughout 2026, there will be opportunities to participate in:

• consultation on the form of the legislation and guidelines to support the recommendations; and
• the co-design process of contracts to support the MMO and the ESEM.

We will also publish more detailed papers on the MMO and the ESEM as they develop.

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 (Draft Report).

On 17 December 2025, the Panel released its final report final NEM Review report (Final Report).

The Final Report finds that while the NEM's core market mechanisms remain broadly effective, the NEM continues to function reasonably efficiently for dispatch, the cumulative pressures across short, medium and long-term horizons demand coordinated, forward-looking reform.

The Final 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 Final Report identifies two key challenges impacting the operation of the NEM (as was the case in the Draft Report):

• (weather dependent and energy constrained): variable renewable energy (VRE) generators. While they produce no greenhouse gas emissions, they are inherently weather dependent, introducing greater day-to-day and seasonal variability in supply. The growing reliance on weather-dependent VRE resources increases 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 visible to the market operator and market participants, the market may not be able to function without significant over-investment.

In the Final Report the Panel identifies in four central themes across the short-, medium- and long-term operation of the NEM. We have set them out below, and they are very similar to the themes identified in the Draft Report:

• (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). One of the most pressing concerns in the operation of the spot market is the emergence of a growing class of non-scheduled resources that are responding to wholesale prices (‘hidden participants’) whose behaviour, and impact on the system, are not directly visible to AEMO and market participants in real time;
• (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. If left unaddressed, this could result in a less dynamic and more concentrated retail sector with opaque prices, reducing choice for consumers and undermining the competitive pressures that help keep prices efficient;
• (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): uncertainties driven by policies to achieve entry before exit. Consumers expect a seamless, uninterrupted transition with new generation capacity and the requisite system services in place before legacy plants retire. Unless policies to achieve timely delivery of bulk energy, shaping, firming and the requisite system services are implemented through a clear, transparent and predictable framework, they risk creating a vicious cycle: uncertainty discourages investment, delays new entry and triggers further ad hoc interventions, exacerbating the very problem they aim to solve.

Recommendations

The Panel's recommendations seek to work together across the following 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; and
• (consumers): ensuring consumer benefits obtained and maintained.

The Panel makes 12 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.

In the commentary below we have summarised the key recommendations in the Final Report and highlighted where and how the recommendations have altered from those in the Draft Report.

1. Retain the energy-only spot market (Same as the Draft Report): 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 (PPR) so they can contribute effectively to market price formation (Modified from the Draft Report): Energy Ministers to implement a mandatory framework for PRR visibility and participation in dispatch by commissioning AEMO to develop by December 2026 a framework that:

• defines fit-for-purpose visibility modes and their adoption into operational forecasting;
• establishes thresholds for mandatory participation - in the Final Report, mandatory participation thresholds have been recommended at aggregated capacity for CER and for large users of greater than 30MW; and
• provides advice on consumer for full implementation to be made under the NEL by 2030.

3. Facilitate CER participation (Same as the Draft Report): 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 (Modified from the Draft Report): 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 (in the Draft Report, there was a recommendation about certain action the AER should take that have been removed).

5. Review market price settings (Modified from the Draft Report): The Reliability Panel should provide a long-term outlook on the form of the market price settings as an enduring and ongoing responsibility. It should undertake a review in 2026 which provides an initial long-term outlook on the form of the market price settings and the appropriateness of the form of the settings for the future electricity market.

6. Mandatory market making obligation (Significantly modified from the Draft Report): The Panel proposes a significant reform with the introduction of a permanent market making obligation (MMO). Unlike the Draft Report, the recommendations in the Final Report are not as prescriptive and indicate the implementation of the MMO will be determined on a region by region basis (including which contracts are designated and the thresholds to apply to the region and when the MMO will apply). Key items are:

• The MMO framework should apply to contracts for all services (bulk energy, shaping and firming) defined by the industry-led contract co-design process with the AER playing a designation role (this is a significant change from the Draft Report as the AER will not have a design responsibility – also see our commentary below on the Contract Design Process that is included in a new recommendation (see item ‎7 below));
• Initially, the designated contracts for firming services should be caps, and the designated contracts for combined bulk energy and shaping services should be baseload swaps;
• The AER should be responsible for assessing whether the MMO should be triggered for that contract and in which NEM regions. The AER assessment should be based on pre-determined objective liquidity thresholds developed through consultation with industry and energy ministers should be able to opt out of the application of the MMO in their region (this is a significant change from the Draft Report as there is now a jurisdictional consideration to be applied as to whether the MMO should apply and if it does what it looks like);
• The MMO should be triggered as soon as possible in South Australia and should initially apply only to cap contracts in South Australia (this is a significant change from the Draft Report and it aligns with the Firm Energy Reliability Mechanism introduced in South Australia); and
• The MMO should cover suppliers of the relevant services in each region that are above a specified threshold, and should set requirements for minimum trading volumes and maximum bid-offer spreads with trading occurring via an AER-approved exchange and OTC platform (including energy trading business acting as voluntary market makers) (this is a significant change from the Draft Report as the Panel has moved away from specified thresholds and also recognized the activities of non-ASX exchanges and the utility of the OTC market).

The MMO would be introduced via an amendment to the National Electricity Law (NEL) and NER.

7. Contract Design Process to support the MMO and the Electricity Services Entry Mechanism (ESEM) (New recommendation but adapted from some recommendations in the Draft Report): The Panel has recommend the regular convening of an industry-led co-design process (e.g. every four years (with the AER and the ESEM Administrator as co-convenors)) to include financial market bodies, project developers, brokers, generators, retailers and consumers. The Clean Energy Finance Corporation (CEFC) should be a standing participant of the group. The co-design process should be specified in the NEL and NER, and the AER and ESEM Administrator should specify how the co-design process operates in guidelines.

The contracts to be developed through the co-design process should be:

• able to be traded on an exchange platform;
• the subject of the MMO;
• able to be traded in smaller parcels to reflect the smaller nature of individual generators; and
• utilised to contract through the ESEM.

Following the publication of the Draft Report, the Panel convened a pilot group to consider the design of these contracts. The Final Report sets out the outcomes of that process that was used and should be adapted as part of this recommendation.

8. Extend Market information (Similar to the Draft Report): Extend market information by lengthening the medium-term projected assessment of system adequacy (MT PASA) from three to five years to support longer-term derivatives market liquidity and price discovery.

9. Electricity Services Entry Mechanism (Modified to the Draft Report): The Panel recommends establishing an ESEM within the NEL to:

• address the ‘tenor gap’ (the Panel describes this as the mismatch between the long-term contracts needed by sellers to finance capital-intensive assets (often 10 to 30 years) and the short-term contracting of buyers (typically three to seven years)); and
• facilitate investment in bulk energy, shaping, and firming services.

Under this model, a central scheme vehicle called the ESEM Administrator will contract for standardised, fungible contracts developed through the industry-led co-design process (described above) with new projects for the later years of their life (post 3 years) and then progressively sell these contracts back into the market as demand arises. (A key change from the Draft Report is to reduce the "in-market" period applicable to a project before an ESEM contract is expected to apply from 7 years to a minimum of 3 years. There is also more emphasis on earlier recycling of ESEM contracts to improve liquidity sooner).

10. Align Regulatory and policy settings (Same as the Draft Report): 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.

11. Zero emissions technologies to provide firming at scale (New recommendation): ARENA, in collaboration with CEFC, is tasked with accelerating the development and deployment of zero emissions technologies capable of providing firming at scale. These technologies could include long-duration lithium-ion energy storage, compressed air storage, iron air or flow batteries, pumped hydro, hydrogen turbines and engines, small-scale aggregated demand response or industrial demand response.

Next Steps - Implementation

The Final Report has been reviewed by the Energy and Climate Change Ministerial Council and its communique of 16 December, in summary, stated:

Throughout 2026, there will be opportunities to participate in:

• consultation on the form of the legislation and guidelines to support the recommendations; and
• the co-design process of contracts to support the MMO and the ESEM.

We will also publish more detailed papers on the MMO and the ESEM as they develop.

Other authors: Paul Newman, Consultant; Odette Adams, Counsel; Tristan Shepherd, Senior Associate; Robert Gough, Senior Associate; Murray Rissik, Lawyer and Porscha Harper, Graduate. 

Want to know more?

• What's in the NEM Wholesale Market Settings Review Draft Report? (12 August 2025)
• Powering Change: A new era for the energy transition
• Nearing Net Zero