No major changes but some important tweaks in final Nelson Review – more visibility, shorter tenors

Tim Nelson, the chair of the eponymous Nelson Review on the design of Australia’s energy markets, says there are no major changes from the draft delivered earlier this year, but some important tweaks.

Nelson told Renew Economy soon after the conclusion of the state and federal energy ministers meeting in Canberra on Tuesday that the major tweaks are around the issue of tenor (the length of contracts for new generation and storage), and on visibility of resources, such as data centres, batteries and EVs.

“It’s been a long journey,” said Nelson. “I’d say that (the final version) is more about what has been tweaked from the draft, because we had fairly broad support for most of the recommendations that we put forward in the draft.

One of the main ones is on the issue of tenor, and the need for a longer term price signal to encourage investment in new projects.

The Nelson Review initially pitched for a tenor of around 7 years through its proposed new mechanism – known as Electricity Services Entry Mechanism (ESEM) – but it is now happy to settle for four, with a minimum of three years.

“We heard loud and clear that the market period needed to be shorter,” Nelson told Renew Economy. “So that’s where we’ve gone for no less than three years.

“The other tweak is that we heard loud and clear that having an always on market making obligation maybe would be imposing costs that don’t exceed the benefits.

“So we’ve … revised that to be a permanent framework for a market making obligation only to be switched on when liquidity falls below thresholds that are deemed acceptable by the regulator. So the power to always do it, but only to do it when it’s in effect required.”

Nelson says that the other tweaks come in what he describes as a greater focus on visibility and “less on dispatchability.”

“So rather than than all of the VPPs (virtual power plants) following dispatch instructions, it’s more just than providing visibility about what their intentions are, so that the market can can clear more efficiently,” Nelson says.

“So again, they’re tweaks rather than than significant changes, and that’s largely because we heard from stakeholders that they were comfortable with the direction, but they thought that, you know, each recommendation could be tweaked and improved.”

The final details of the recommendations will be handled by state and federal officials – with further consultation with industry – and most are due to come into effect once the Capacity Investment Scheme concludes in 2027.

The CIS is designed to provide the impetus of investment to help reach the federal government’s target of 82 per cent renewables by 2030, and the Nelson review is focused on providing the best mechanism for future investment.

The main feature of the draft and final versions was the decision to keep the market structures basically intact, with a few important changes to focus on the needs of new investment in variable renewables, and to ensure sufficient storage and dispatchable generation.

The recommendations have been approve by the ministerial council, although the new state LNP government in Queensland, which has torn up the state’s renewable targets and vowed to try and keep coal in the system until 2049, did not support it.

Nelson told Renew Economy that the idea of the final design is to provide for maximum flexibility.

“n the immediate term, we think probably a sensible position to start is to say, no less than three years, and provide flexibility for the system administrator to think about what’s the optimum in market length to make sure that you’ve got the right in market signal,” he said,

“So getting the right projects being brought forward, and then using the ESEM to effectively warehouse the tail end risk temporarily.

“So that’s largely due to all the great feedback we had from investors, but also consumers, so we did a lot of consultation the second half of the year, and so those tweaks have largely reflected a lot of those conversations.

“We think that it’s not set in stone. It should be flexible, so that the scheme administrator can reflect and as people become more comfortable with and technology becomes a little more certain in the sense of its cost structures and those types of things … that’ll probably lengthen out.”

On visibility, particularly in small scale and consumer energy resources, Nelson argued that it’s more important to understand people’s intentions, rather than be focused on the price.

“So you wouldn’t want a situation where you’ve got a whole bunch of small scale resources that, say, discharge into the market expecting a high price, but AEMO doesn’t know that’s going to happen,” he said.

“So (let’s say) it’s already scheduled a whole bunch of large scale batteries, and then as all of those batteries come into the market, you then need to correct the frequency response by getting a whole bunch of other batteries to charge.

“That would be a really bad outcome. And so this is really just trying to ensure that that visibility results in an efficient price, which, over time, results in lower overall investment, you know, reducing costs, just getting a more efficient outcome.”

Renew Economy will be digging deeper into the findings of the Nelson Review on Wednesday. Please email us at editor@reneweconomy.com.au if you have any comments and observations.

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