Post-2030 contract design for new renewables takes shape as working group agrees on firming price caps

Efforts to shape the National Electricity Market beyond 2030 are progressing, with the working group charged with drawing up key changes to the grid releasing results of its latest designs.

The contract discussions, convened by AusEnergy Services Limited (ASL), produced an agreement last week that will covering three services that will underpin the Electricity Services Energy Mechanism. 

The working group – which includes developers such as Acen Australia, Iberdola Australia, Origin Energy and Akaysha Energy, and government agencies such as SA Water and the Clean Energy Finance Corp – reached agreement to advance a preferred contract structure for bulk energy, shaping the power price profile and setting a $600/megawatt-hour cap on firming.

More details on each of the preferred structures, agreed at the group’s latest meeting, are available here. The group agreed to arrange another industry webinar prior to the next meeting to outline the WG’s preferred contract structures for each of the electricity services. 

The ESEM was a major recommendation of the Nelson Review into the future of the grid, released just over a year ago.

The review, led by energy veteran Tim Nelson, proposed the ESEM as a replacement for the existing Capacity Investment Scheme that was introduced by the Albanese Labor government to improve the investment appeal of clean energy.

Securing unanimous approval from the federal, state and territory governments for the ESEM may be challenging, particularly after the Liberal-National Party took office in Queensland in October 2024.

Still, the working group’s progress points to some underlying momentum in the National Electricity Market’s redesign.

Of the decisions, the design of the bulk energy contract as the basis for regional reference power purchase agreements is considered to deliver a better balance of volume-risk allocation between sellers and buyers, and hence a more bankable outcome for developers.

• The Regional Reference PPA was considered to be a “middle ground” between two products previously weighed up for the design, a so-called DWA swap and a revenue swap.
  
• Between those two, the DWA swap placed the most volume risk on a particular project and, hence, carried greater bankability concerns.
  
  By contrast, a revenue swap would have placed volume risk on the buyer and, consequently, deterred interest from them.
  
• A regional reference PPA serves to balance these risks, giving the buyer and seller exposure to the performance of a reference fleet, according to designers.
  
  Settlement volume is derived from the performance of the reference fleet, balancing the risk between buyers and sellers. Sellers are incentivised to outperform the reference fleet and buyers enjoy reduced volume risk by not having the performance of an individual project exposed.
• 
  The Clean Energy Investor Group has been working closely with the Contract Co-Design working group “to make sure the bulk energy, shaping and firming contracts chosen for the ESEM are designed to support the entry of new investment”, Richie Merzian, the group’s chief executive officer, said.

“We are looking for the right balance of risk between parties. Contracts that push too much risk onto proponents flow straight through to a higher cost of capital — and ultimately a higher cost for consumers.”

“Get that balance right, and the ESEM can bring forward investment at the lowest cost to the system,” Merzian said.

Robert Potter, Smart Energy Council’s head of Advocacy and Policy, said: “Our critical test of the ESEM co-design process is whether it can properly reflect the value of long-duration energy storage because most of the market doesn’t.” 

“Price signals cap out well short of the multi-day events that long-duration storage is built for, and the tender and procurement processes built on top have maintained that same blind spot,” Potter said. “It’s a key investment signal missing from the market.”

“It’s encouraging to see the working group land on preferred structures for each of the three services, but the detail on firming in particular, must do more than maintain the status quo” he said.

“If the firming product is designed around a cap that effectively tops out at seven or eight hours, it won’t send the signal needed to bring forward pumped hydro and other long-duration technologies,” Potter said.

“The system will lean on these technologies and capabilities the most during an intermittent drop.”

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