Australia should create a permanent scheme to support long-term capacity investment for new renewable energy in its National Electricity Market (NEM) to evolve, "not revolutionise", the Capacity Investment Scheme (CIS), according to the NEM review panel's draft report released today.
The creation of a so-called Electricity Services Entry Mechanism (ESEM) would keep the core features of existing schemes like the CIS but would be embedded in the energy market, the NEM review panel said on 6 August.
An independent ESEM administrator would run competitive auctions similar to the CIS, but for contracts that only support the later years of a project's life, according to the draft report. The panel anticipates this to be from 5-7 years to up to 20 years after commissioning for conventional renewable generation projects.
This would help address a key issue preventing investment in the NEM — the so-called "tenor gap", a mismatch between the long-term contracts needed by sellers to finance capital-intensive assets and the short-term contracting of buyers, according to the panel.
The panel recommends retaining the real-time regional energy-only spot market with "necessary rule changes" to ensure its continued efficient and competitive operation.
Tenders under the CIS will run every six months until 2026-27. The scheme was expanded in July, taking the total supported capacity from 32GW to 40GW. The government announced a review of the NEM in November 2024 to address wholesale market settings after the conclusion of CIS tenders in 2027. The CIS tenders will provide up to 15 years of support, but new settings will be needed to promote investment in renewable generation and storage capacity into the 2030s and beyond, especially as the Renewable Energy Target scheme will come to an end on 31 December 2030.
No transmission or carbon changes
The scope of the NEM review does not include fuel markets, carbon markets or planning assessments and has little mention of transmission.
Transmission was out of scope of the NEM review but it continues to be the missing link to long-term investment, Australian energy transition advisory firm Nexa Advisory chief executive Stephanie Bashir said on 6 August. More transmission infrastructure needs to be built for the best market solutions and an expanded CIS to succeed, she added.
Australia's decarbonisation efforts are focused on replacing coal-fired generation with renewable energy. Energy utilities raised concerns about the timeline for the phase out of coal-fired power generation in submissions to the review consultation process.
The review is open for consultation and responses are due by 17 September. The final recommendations report will be complete by the end of 2025, and the panel aims to consult with governments in the first six months of 2026 to start enacting the recommended changes.
