The review of the National Electricity Market (NEM) wholesale market settings, announced in November 2024 (NEM Review), continues. This review and adjacent reviews could introduce fundamental changes to the NEM in the mid to long term.

Why should you care?

The NEM Review and adjacent reviews come with a tacit recognition by Australian governments that the design of the NEM is no longer wholly fit-for-purpose. Potentially significant market reforms may be needed to ensure a secure, politically acceptable, energy transition to meet our international and domestic renewable targets.

If you have assets exposed to the NEM, or energy contracts beyond 2027, these reviews could result in material changes to your commercial or contractual position. You have an opportunity now to participate in the consultation process, and only a few years to react if the changes (once known) are disadvantageous to your position.

How can MinterEllison help?

The impacts of these reviews could result in a mixture of technological, market, strategy and legal issues. At MinterEllison, we recognise the nuanced implications brought by challenges like those arising from changes to the NEM. We serve our clients by combining legal and consulting expertise and fostering an interdisciplinary way of working. We are well placed to help you understand the potential implications.

The broader context – how we got here

When the NEM was established in 1998, the electricity system was markedly different from today's landscape. Hydro, coal, gas, and diesel dominated generation capacity, characterised by large generators, and some large and many small consumers. The creation of electricity markets, both spot and futures, was a global trend aimed at enhancing transparency and efficiency. These markets were designed to facilitate the lowest possible cost configuration, send the right signals to investors to drive innovative technologies, and provide consumers with electricity price transparency.

As extensively documented, this structure has struggled to keep pace with technological advancements, particularly the shift towards renewables and other assets with high capital expenditure but low operational costs. Today, the system is a complex network of small and large assets, with the distinction between consumer and generator increasingly blurred. Although the original objectives of the NEM remain — efficiency in generating electricity, clear investment signals, transparency for consumers and increasingly sustainability — the current setup is no longer meeting these goals. Particularly given increasing renewable penetration, the electricity market is very different to when the NEM commenced.

In response, federal and state governments have begun implementing solutions to address the system's deficiencies. Less than a decade after the NEM's inception, governments began to intervene with the market design. This process of change and adaptation is ongoing. In our view, we are now in the position where State and Federal policy interventions are as important as market design in driving new investment into the system.

Furthermore, the dilemma at the start of the NEM of balancing cost and reliability has evolved. It initially evolved into a 'trilemma'— introducing sustainability as a competing consideration to cost and reliability — but has now expanded to a 'quadrilemma'. This includes community considerations, with the emphasis on energy autonomy and the local impacts of energy systems.

Today, outside of the NEM design, the energy transition is being driven by a complex patchwork of contracts, each designed to perform specific functions. Green Power Purchase Agreements (PPAs) have been increasingly transacted to secure carbon-neutral energy. Government sponsored capacity investment scheme contracts will expedite the adoption of renewables and non-thermal short duration storage solutions. Additionally, support agreements provided by state governments are keeping thermal power stations like Eraring and Yallourn operational. These are some examples of the contracts layered over the NEM's core design.

The State and Federal governments have their own renewable energy targets, which are looking increasingly challenging to meet. The NEM's history also demonstrates that governments will allow market design to function until they feel the need to intervene. This is to counteract political pressure when one or more of the competing components of the energy quadrilemma unduly impacts their constituents. This may be in the form of higher energy prices, low reliability (desire to 'keep the lights' on), a lagging transition, or communities being excluded from having a say on the energy transition.

In this context, the stakes are getting higher. Consider, for example, the consequences of increased electrification magnifying the impact of potential blackouts, if the supply is not developed or maintained in lock step. Similarly, failing to meet the Paris Agreement targets could lead to escalated geopolitical tensions. Moreover, the risk of diminishing Australia's energy competitiveness in export industries looms if local energy prices remain higher than those abroad.

The NEM Review looks at only some of these challenges. It is one of (at least) three major reviews, all with different objectives:

• The purpose of the NEM Review is "to recommend wholesale market settings to promote investment in firmed, renewable generation and storage capacity in the NEM following the conclusion of the Capacity Investment Scheme tenders in 2027."
• Separately, just prior to last Christmas, the Federal Senate's Select Committee on Energy Planning and Regulation in Australia made twenty-two recommendations including a recommendation, which was not supported by government senators, for a Productivity Commission inquiry into the efficiency and planning of the Australian energy grid.
• The new Guarantee of Origin (GO) scheme, still under consultation, may result in time-stamped certificates for renewable energy production (affecting how renewable developers sell green certificates and energy consumers manage their carbon reduction efforts).

All of these reviews potentially trigger major changes. An example of how the three reviews could impact a renewable project is:

• the asset support funding through the Commonwealth's Capacity Investment Scheme will be different if the NEM Review impacts the type of assets entering the market at the Scheme's conclusion;
• any changes to transmission rules from the Senate's review may affect a developer's wind farm location, making it much easier or harder to connect to the grid; and
• the introduction of GO scheme may make a portfolio of renewable PPAs that match volume (but not time of consumption) inadequate to support an offtaker's future Net Zero claim.

The debates have only just begun, and while excellent scholarly diagnosis of the issues facing the NEM is available, a lack of consensus on widely accepted solutions shows how complex the issues are.

The assets and medium–long dated contracts, and any related carbon disclosure/commitments, that could be impacted include:

• market generators and retailers;
• customers with energy retail contracts or renewable PPAs;
• Behind-the-meter energy installations exposed to the NEM or its ancillary services markets;
• Electricity price-linked supply contracts of other goods and services;
• Sustainability linked contracts (including debt).

If impacted in any of these ways, you should participate in the consultation process and begin preparing to manage any resulting changes to the NEM. Here are three potential immediate actions:

• Model the potential impact of changes to the NEM on your strategy, including implications for long-term Net Zero targets, shifts in cost positions, need for more/less long-term exposure, and impact on business cases;
• Assess your exposure to significant changes to the NEM across medium-long term contracts, and how this may evolve in the short term. Understanding how the value at stake of these contracts may change, and assess whether there are contractual or non-contractual options to derisk any potential value loss.
• Consider who is responsible to assess and manage NEM risk within your organisation.