Policy certainty and market accessibility continue to be critical for investors looking at the energy transition as a fertile source of opportunity – especially in capital-intensive generation projects. The Nelson Review (a 2025 independent review of Australia’s National Electricity Market) highlighted the need for mechanisms that would encourage new capacity while maintaining system stability and affordability.
To lower barriers for new participants, the Nelson Review proposed the introduction of the Electricity Services Entry Mechanism (ESEM) which:
- is an underwriting mechanism to bridge the gap between offtaker and developer contract tenure expectations for new zero emissions projects and new or existing shaping and firming services, and
- provides investors with a new avenue, ESEM contracts, to de-risk project cashflows in the mid-long run horizon (ie beyond the 3-year horizon).
For those able to access the ESEM, it can offer a valuable platform for projects requiring longer underwriting periods, especially for capital‑intensive developments such as pumped hydro and gas generation.
The review provides an enduring, market-based approach to resolving the misalignment between investor and offtaker expectations by providing a government underwrite to resolve mid to long run revenue risk.
It has the potential to shape a more competitive and investable electricity market, by influencing capital flows and allocations. This will be particularly interesting for gas generators if they are able to access the mechanism to improve investor confidence.
Intention behind ESEM contracts
An ESEM contract represents a structured, government-backed revenue support mechanism designed to boost project bankability.
Key contract features
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A government-underwritten offtake framework, facilitated through fungible contracts (ESEM contracts) providing revenue support beyond the initial 3 years of a project. |
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Allocation following a competitive reverse auction process. |
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The ‘recycling’ of ESEM contracts by the administrator of the ESEM once demand materialises (closer to year 8 of a project) to assist with providing transparent forward pricing signals to the market and addressing long-dated revenue certainty. |
Investment rationale:
- Provide revenue certainty in the later stages of a project’s life at a time when its most needed (i.e. on development/financing), materially reducing risk and improving access to capital; and
- focus investment on services that are necessary to support the long-term viability of the National Electricity Market.
ESEM contracts – breaking it down
ESEM contracts will be developed based on input from an industry body co‑convened by the Australian Energy Regulator and the ESEM Administrator (Co-design group) and will cover the procurement of possible identified, services which are outlined below.
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Looking ahead - What to expect
Progress has commenced with an industry-led Working Group on co-design of the contract structures with the aim of proposed term sheets by November. In early 2027 there will be the development and formalisation of final contract templates.
Investors should look out for the first ESEM Contract tender, which is scheduled to be held by the end of 2027.
Importantly, Queensland, unlike all other National Electricity Market jurisdictions, has not yet accepted the findings from the Review.
