The Capacity Investment Scheme (CIS) has demonstrated government market design can influence investment behaviour.
Since its introduction, the CIS – Australia’s massive renewable energy underwriting program encouraging investment in new generation and storage – has progressively strengthened incentives for First Nations engagement, participation and ownership.
Through successive competitive tenders, developers have been incentivised through scheme design to invest in stronger partnerships and more ambitious First Nations outcomes.
In turn, First Nations organisations and industry have learned what is needed to ensure renewable energy projects deliver better outcomes for First Nations peoples.
As governments prepare to transition beyond the CIS to the longer term framework – the Electricity Services Entry Mechanism (ESEM) presents an opportunity to build on CIS progress.
Currently being developed, the detailed ESEM implementation will help determine whether Australia’s next generation of electricity market reforms supports the vision set out in Australia’s First Nations Clean Energy Strategy 2024-30, or whether momentum established through the CIS is lost.
An enduring investment frameworkÂ
Like the CIS, the ESEM is designed to encourage private investment by providing greater long-term investment certainty.
However unlike the CIS, which operates through successive competitive tenders relying on government support programs, the ESEM aims to establish an enduring market mechanism providing long-term investment signals for services Australia needs to maintain a reliable electricity system – such as generation, storage and dispatchable capacity needed to support a secure electricity grid as renewable energy replaces coal-fired generation.
Governments intend the ESEM to become the principal long-term investment mechanism following the completion of current CIS tenders.
Subject to final design decisions, the ESEM is expected to become Australia’s enduring investment framework.
ESEM design must continue to support First Nations outcomes
The detailed design of the ESEM is still being developed.
Current proposals indicate governments will identify future electricity services needed to maintain system reliability and will procure long-term financial contracts encouraging private investment in those services.
Importantly, the current design differs from the CIS in one significant respect.
Under the CIS, governments progressively incorporated broader public policy objectives, including First Nations participation, into the competitive tender process through assessment criteria and contractual commitments.
Unlike the CIS, the ESEM separates the assessment of non-financial outcomes from the competitive auction itself. This represents a significant shift.
Under the CIS, proponents competed not only on price but increasingly on the strength of their First Nations commitments.
Under the proposed ESEM, those commitments may instead become minimum eligibility requirements rather than factors that improve a project’s competitive position.
This means First Nations outcomes will increasingly depend on the quality of policy frameworks, gateway requirements and ongoing compliance arrangements, rather than competition within the auction.
Under the current ESEM proposal, the competitive auction itself is expected to focus primarily on efficient procurement of electricity services, while broader public policy objectives are more likely to be addressed through project eligibility requirements, gateway criteria, contractual obligations and complementary state government policies.
How these elements are designed will be critical to ensuring the ESEM continues to support strong First Nations outcomes.
Decisions being made today will determine whether the ESEM builds on the progress already made through the CIS or whether important incentives for First Nations participation and ownership are weakened.
Government has demonstrated it can influence the market
The experience of the CIS demonstrates that governments can influence outcomes.
Over time, successive CIS tenders have strengthened First Nations assessment criteria, required clearer commitments from proponents and improved monitoring and compliance arrangements.
Most recently, the introduction of dedicated First Nations Set Asides in CIS Tenders 9 and 10, including minimum expectations around First Nations equity participation and benefit-sharing, has demonstrated government procurement and market design can actively support First Nations ownership and investment in renewable energy projects.
This progression is important as it shows First Nations outcomes are not incidental to energy policy. They can be built into the rules, incentives and contracts that shape the clean energy market.
This matters for the ESEM, intended to become the long-term successor to the CIS.
The ESEM should inherit and improve on First Nations policy settings developed through the CIS, rather than allowing those gains to fall away.
Risks and opportunities
The risks are not theoretical.
The experience of the mining boom demonstrates major investment alone does not guarantee lasting First Nations benefit.
Without deliberate policy settings, renewable energy projects may once again be developed on Country while much of the economic value flows elsewhere.
The ESEM design process must reflect on lessons learned.
If First Nations requirements are left only to inconsistent state-based processes, outcomes and incentives will vary significantly between jurisdictions. A nationally consistent framework could reduce uncertainty for proponents by establishing clear expectations across jurisdictions. Rather than navigating different state requirements, developers could work within a common set of First Nations standards that provide greater certainty for industry while delivering stronger outcomes for First Nations communities.
If gateway criteria are too weak, projects may be able to participate in the ESEM without demonstrating credible First Nations engagement, partnership or benefit-sharing arrangements.
If commitments are not enforceable, proponents may make promises before projects are approved but fail to deliver them over time.
If economic participation, including First Nations ownership is not actively supported, First Nations may again be left hosting projects without sharing meaningfully in the economic upside they create.
These risks reflect lessons from earlier stages of the clean energy transition, where First Nations peoples have too often been engaged late, offered limited benefits, or excluded from genuine decision-making and ownership.
Aligning policy objectives
Australia’s First Nations Clean Energy Strategy sets out a clear vision: First Nations peoples should participate in, benefit from and help lead Australia’s clean energy transition.
The Strategy also recognises First Nations peoples as rights holders, not simply stakeholders. This means the clean energy transition should be underpinned by early engagement, genuine partnership and decision-making that respects the principles of Free, Prior and Informed Consent.
The ESEM should reinforce these principles through its eligibility requirements, contractual arrangements and accountability mechanisms.
If the ESEM becomes Australia’s enduring investment framework for electricity services, it must be designed consistently with the First Nations Clean Energy Strategy.
If designed well, the ESEM can help create stronger First Nations outcomes across the clean energy transition to help shift the clean energy transition away from a model where First Nations are treated as stakeholders to be consulted, towards a model where First Nations are recognised as partners, participants and rights holders.
First Nations as rights holders in Australia’s clean energy transition
The ESEM represents a once-in-a-generation opportunity to embed First Nations participation, partnership and ownership into Australia’s enduring electricity market framework.
First Nations economic participation in our clean energy transition, including ownership, must be actively supported.
The ESEM should continue the direction established through the CIS: stronger First Nations participation, stronger accountability, and greater opportunities for ownership and economic development.
The policy choices made now will shape how the benefits of the clean energy transition are shared for decades to come.
Read the full briefing paper by the First Nations Clean Energy Network here
By Jonathan Kneebone is director of policy and engagement at the First Nations Clean Energy Network
