On 16 December 2025, the government‑backed expert panel chaired by Tim Nelson released its Final Report on wholesale market settings for the National Electricity Market (NEM).
The Final Report builds on the recommendations in the Draft Report (released on 6 August 2025 which we previously wrote about here), with a few tweaks to design and implementation rather than wholesale changes. The final package confirms the current energy‑only market design and:
- increases the visibility of price‑responsive resources (PRR) by introducing phased thresholds;
- reframes the proposed “always on” Market‑Making Obligation (MMO) so that it is a permanent, trigger‑based framework that is targeted to address regional liquidity issues; and
- sets out an implementation pathway for the Electricity Services Entry Mechanism (ESEM) to support firmed renewables and storage at scale.
Key changes from Draft Report to Final Report
The key tweaks to design and implementation in the Final report are:
1. Increased visibility of price‑responsive resources (PRR) with clear thresholds and implementation timetable.
To task AEMO with designing a mandatory PRR visibility/participation framework by December 2026, to enable full implementation by 2030 that will place obligations on retailers/aggregators rather than individual consumers as follows:
- Aggregated small batteries >5 MW (no co‑located load): must participate in dispatch mode (active) or as bidirectional units;
- CER aggregations with remote automated control >30 MW: must be in dispatch mode (inactive) (active remains voluntary); below 30 MW must provide quarterly reporting to AEMO;
- Large C&I price‑responsive loads >30 MW: must provide load‑intention data via a dedicated visibility‑only “difference‑bid” mode or participate via wholesale demand response mechanism; and
- Retailers with pool‑price pass‑through/price‑contingent DR portfolios <30 MW (incl. smaller CER aggregations): must submit quarterly reports identifying covered loads.
This phased, capability‑matched approach is intended to bring “hidden” PRR into visible/participative modes to improve forecasting and efficient price formation and reduce FCAS/RERT costs, without over‑burdening static or smaller portfolios.
2. Derivative contract co‑design to be jointly convened.
To provide further detail as to how the standing, industry‑led working group (co‑convened by the AER and the ESEM Administrator) contemplated in the Draft Report will look like. The Final Report recommends that the CEFC be a standing participant and that there be representation from financial market bodies, project developers, brokers, generators, retailers and electricity users.
The Final Report also recommends the periodic development of contracts (for example, every four years) that are standardised and exchange‑tradeable for bulk energy, shaping and firming suited to a firmed renewables system. These products will then underpin both the MMO and ESEM, trade in smaller parcels (e.g., ~100 kW), and can evolve as needs change, ensuring exchange products reflect real hedging demand beyond bespoke OTC structures.
3. MMO as a permanent framework that is liquidity‑triggered.
To provide more details as to:
- who will be captured by the MMO on a mandatory basis and who will be able to participate and access/offer contracts on a voluntary basis, with the MMO, amongst other things, specifically contemplating participation by entities that do not have physical assets themselves (like energy trading houses), on the basis that these entities provide substantial liquidity in the Australian contracts markets;
- the conditionality that will apply to certain participants as part of the MMO, with obligated participants being required to provide contract liquidity with respect to designated contracts with conditionality (linked to minimum trading volumes, bid-offer spreads etc) and certain voluntary participants (i.e. energy traders) being bound by similar conditionality to ensure a level playing field;
- the designation of certain contracts, with cap contracts (for firming services) and baseload swaps (for combined bulk energy and shaping services) being designated contracts in South Australia and remaining contracts to be determined by an industry-led contract co-design group; and
- how the MMO will operate in practice, by reference to a pre-defined objective liquidity trigger to be developed in consultation with the industry-led contract co-design group.
Noting contract liquidity in South Australia, the panel recommends that the MMO should be triggered as soon as possible in South Australia, with respect to cap contracts for firming services only.
4. ESEM as a durable entry signal embedded in electricity law and rules.
To embed in the NEL/NER, a competitive procurement for the three services (bulk zero‑emissions energy, shaping and firming), using standardised, fungible financial derivative contracts developed through an industry‑led co‑design process.
The ESEM issues contracts primarily for the “later years” of a project’s life, that are not easily contracted in‑market – effectively taking a long position. It then recycles those contracts back into the forward market as retailer/C&I demand naturally materialises, supporting retail competition, transparent forward pricing and liquidity.
Significantly, the Draft Report’s proposed five‑to‑seven‑year in‑market period has been replaced with a flexible approach that allows the ESEM Administrator to set the period, subject to a minimum of three years, reflecting feedback that seven years was too long early on.
In addition to core services, the Final Report confirms that the ESEM scheme Administrator can:
- enable the ESEM to coordinate procurement of essential system services where cost‑effective via secondary contracts, coordinated with AEMO and TNSPs;
- facilitate strategic reserves for very low‑probability, high‑impact events at jurisdictional direction on Reliability Panel advice; and
- run special tenders to support technology‑specific targets in the AEMC Targets Statement, with calibrated in‑market periods to recognize the additional barriers of the relevant technology (e.g., offshore wind, pumped hydro).
5. Prudentials and counterparty risk: whole‑of‑market review, sequenced after settlement reforms.
To reduce the capital intensity of prudential requirements across spot and futures markets by commencing a multi‑agency review involving Treasury, APRA and ASIC to improve access and improve efficiency of capital used as credit support, without compromising financial integrity.
This should follow completion of the NER change to shorten the wholesale settlement cycle in 2026.
Implementation pathway and timing
On 16 December 2026, state and federal energy ministers provided in‑principle agreement to the recommendations of the Nelson Review on market design, with the notable exception of Queensland. From here, the final details of the recommendations will be handled by state and federal energy ministers.
The Panel urges energy ministers to support timely implementation, leveraging existing institutions and adopting interim governance so there is no gap after the Capacity Investment Scheme concludes in 2027, with workstreams running in parallel to enable an ESEM pilot in late 2026 and formal commencement in early 2027.
The pathway envisages:
- early, industry‑led contract co‑design convened by the AER and an interim ESEM Administrator, and initial MMO application in South Australia (starting with caps);
- appointment of an interim ESEM Administrator (e.g., AusEnergy Services Limited), with post‑dated authority once legislation is passed, to accelerate delivery and provide near‑term market certainty;
- adequate and timely resourcing for the AER, AEMO and the ESEM Administrator to progress implementation concurrently with legislative processes, supported by strong governance and risk management capability (including AFSL where applicable); and
- an industry‑facing delivery program with clear accountability and regular, transparent engagement with peak bodies, industry and consumers to keep implementation on track.
Key milestones and supporting reforms include:
- ESEM: pilot by late 2026; formal commencement by early 2027;
- PRR visibility/dispatch framework: AEMO to develop by December 2026 (defining visibility/participation modes and thresholds), with NEL/NER amendments progressed to enable full implementation by 2030;
- MT PASA: extend and publish generator availability projections from three to five years to support longer‑dated liquidity and price discovery; and
- RRO: once ministers are satisfied the ESEM and MMO are working effectively, phase out the Retailer Reliability Obligation.
What it means for different market participants
The reforms are detailed and, if implemented, will affect different market participants in distinct ways:
- Generators and storage: access to longer‑term hedging products and clearer, rules‑based revenue support via ESEM contracts;
- Aggregators and responsive loads: progressively stronger visibility and dispatch obligations (matched to capability), paired with consumer protections to keep participation simple and trusted;
- Retailers: increased contract market liquidity in the form of designated contracts, longer‑horizon market information through MT PASA changes, potentially more efficient prudential requirements; and
- Investors: a more stable, rules‑based entry regime (ESEM/MMO), better visibility of forward market settings, and prudential changes that reduce policy/counterparty risk.
What to watch next
- AEMO consultation on PRR modes, thresholds and visibility mechanics through 2026, with a mandatory framework ready by 2030.
- AER and ESEM Administrator convening the first contracts co‑design round to define core products for MMO/ESEM; early MMO application to SA cap contracts once liquidity triggers are set.
- Legislative packages to embed ESEM/MMO and related reforms in the NEL/NER, with interim appointments (e.g., the ESEM scheme administrator).
- Multi‑agency scoping for the prudential/counterparty risk review, sequenced after settlement‑cycle shortening.
