Former NEM Review Chair Urges Industry Action as Australia Shifts From Fuel Storage to Energy Storage

Why It Matters

The reforms and new contract frameworks are critical for unlocking financing and ensuring liquidity in Australia’s rapidly expanding battery‑storage market, directly influencing the nation’s renewable energy transition.

Key Takeaways

• NEM shift from fuel to energy storage.
• Contracts need to handle variable supply and demand.
• Tenor gap hampers financing large storage projects.
• AEMO's contract co-design seeks market‑based solutions.
• ESEM revised to 1‑3 year term for risk mitigation.

Pulse Analysis

Australia’s electricity landscape is undergoing a structural overhaul, moving from a legacy model that stored fuel before generation to one that generates first and stores energy in batteries, pumped hydro, and other technologies. This inversion creates new risk profiles: supply now fluctuates with weather, while demand remains variable. Existing market mechanisms, designed for a predictable, fuel‑centric grid, struggle to price and hedge these dual uncertainties, prompting calls for innovative contract structures that reflect both supply and demand volatility.

Financing hurdles have intensified as banks seek long‑term revenue contracts to underwrite large‑scale storage projects, yet retailers hesitate to lock in prices amid expectations of falling costs. The resulting tenor gap has forced government intervention through schemes like the Capacity Investment Scheme, but a sustainable solution lies in market‑driven instruments. AEMO’s contract co‑design initiative, conducted with industry participants via the Australian Storage Laboratory, aims to develop standardized products—such as variable renewable‑energy profile contracts, virtual tolls, and cap contracts—that can provide the needed revenue certainty while preserving flexibility for a weather‑dependent grid.

The Electricity Services Entry Mechanism (ESEM) has been recalibrated in response to industry feedback, shortening its contract horizon to one to three years. This adjustment reduces exposure for both buyers and sellers, allowing developers to secure risk‑mitigated support without becoming derivatives experts. By offering multiple pathways—direct ESEM contracts, conversion to physical PPAs, or aggregation into financial portfolios—the mechanism encourages broader participation and accelerates investment in storage assets, a cornerstone for Australia’s clean‑energy future.