​Australia’s power system is shifting from fuel-driven price formation to a world dominated by renewables, storage and demand flexibility. The first draft of the Nelson Review concludes that the NEM should maintain its energy-only core, but adjust the rules to ensure pricing remains efficient as variability and volatility increase. It also recommends the introduction of a long-dated investment backstop via the Electricity Services Entry Mechanism (ESEM).

The recommendations published in the report are focused on the three time horizons: the short-term spot market, the medium-term derivatives market, and long-term incentives for new capacity.

In this article, we summarise the key recommendations from each and the impact on BESS.

Executive Summary

• ​The Nelson Review keeps the NEM energy-only model but recommends targeted reforms across short, medium and long-term market horizons.
• Short-term reforms focus on better oversight of autobidding and rebidding, visibility of customer energy resources (CER), and incentives for TNSPs to reduce outage-driven volatility.
• Medium-term reforms centre on stronger derivative markets, built around three standardised contract types: bulk clean energy, shaping, and firming. These should improve liquidity and form the basis of the ESEM.
• The Electricity Services Entry Mechanism (ESEM) addresses the “tenor gap” by underwriting later-year contracts to lower the cost of capital for new clean energy and firming projects.
• For BESS, the review means more operational transparency, deeper participation in derivative products, and potentially cheaper finance through long-term ESEM contracts

Summary: What is the Nelson Review?

The Nelson Review, formally the NEM Wholesale Market Settings Review, is an independent examination of how Australia’s wholesale electricity market needs to evolve as coal exits and renewables and storage scale up. Its core conclusion is that the current energy-only spot market should remain the foundation, but its supporting settings need reform so investment and reliability can be maintained without excessive consumer cost.

The review seeks to solve the “tenor gap” in financing. Project developers often need 10–30 years of revenue certainty to raise capital, but buyers (e.g. off-takers) are increasingly unwilling to contract beyond 7 years. This mismatch leaves later-year revenues facing merchant risk, raising costs and stalling projects that would otherwise be viable.

The review proposes the Electricity Services Entry Mechanism (ESEM) as a long-term contracting backstop, allowing the market to price short-term risk while a government-facilitated “warehouse” underwrites standardised, tradable contracts for years 8–15 and beyond.

By addressing the tenor gap, the review aims to lower the cost of capital for new zero-emissions and firming projects—especially batteries—while preserving sharp price signals in the spot market.

Short-term market settings: keep the spot market but certain problems need attention

The panel recommends retaining the real-time regional energy-only spot market. This means no capacity market, locational marginal pricing, or physical-ahead layer (i.e. day-ahead). Instead, the review recommends making targeted rule changes to keep dispatch efficient as bidding behaviour and network conditions evolve.

Four short-term priorities matter most for storage:

1. Rebidding & algorithmic bidding oversight. The report discusses concern around “excessive” rebidding and algorithmic collusion in bidding. It proposes market bodies work to understand scale and set governance standards. AER analysis on extreme prices links rebidding to many of these events, but also finds it hard to define “excessive”.
2. State-of-charge transparency. Since 1 July 2025, AEMO has been publishing battery state of charge data in real-time. The report asks market bodies to analyse whether this adequately mitigates reliability risks of duration-limited assets mis-forecasting peaks. Recent volatility in June and July has shown how this can cause prices to spike higher than necessary.
3. Transmission outage impacts. Outages and constraints frequently create the conditions for price spikes - 73% of extreme-priced hours in 2024 and 2025 have occurred during periods of network constraints. The Nelson Review backs stronger incentives on transmission operators to minimise wholesale market volatility and suggests the AER works to curb market-power opportunities during outages.
4. Make price-responsive resources visible. By 2030, aggregated small batteries, VPPs and large responsive loads should either participate in dispatch or be visible in the market. This would improve price formation and forecastability without imposing full scheduled-plant obligations on every asset.

What this means for batteries right now: Auto-bidding scrutiny seems likely to increase, state-of-charge transparency is here but could evolve, and price volatility may soften over time if networks are properly incentivised to time outages and CER market participation improves.

Medium-term market settings: visibility, liquidity, and future-proofing

For the medium term the review focuses on the derivatives market and ensuring this is aligned with the needs of the system and the ESEM. This reform and the final design of any new contracts will be determined by industry, with the AER facilitating this.

The Nelson Review stresses that forward markets need deeper, longer-tenor hedging so retailers can manage volatility and developers can finance capital-intensive assets. To make this happen, the market should converge on three standardised product types:

1. Bulk clean energy contracts (essentially firm, zero emission supply blocks, likely through Renewable Energy Guarantee of Origin (REGO) certificates).
2. Shaping contracts (for example, virtual tolls with nominations or a simpler swap based on top-bottom (TB) spread).
3. Firming contracts (today’s Cap contracts seem likely to remain the best option).

These standardised products are critical because they form the foundation for both future day-to-day risk management and the long-term ESEM auctions. The intention is that this will create a consistent bridge across short, medium and long horizons.

Implications for BESS: VPPs and grid-scale batteries will face firmer expectations to become active players in future derivatives markets by selling shaping and firming products. Standardisation should lower transaction costs, improve liquidity, and align BESS portfolios with the ESEM’s long-dated auctions. This could reduce barriers to entry to selling these contracts for smaller portfolio owners.

Long-term market settings: the ESEM backstop

The centrepiece of the Nelson Review is the Electricity Services Entry Mechanism (ESEM). This would be a permanent mechanism embedded into National Electricity Law (NEL), replacing the Capacity Investment Scheme (CIS). It contracts only the later years of project life, leaving early years to the market. It targets the “tenor gap” between buyers’ 3 to 7-year appetite and sellers’ 10–30-year finance needs by using standardised financial derivatives to lock in revenue for years the market won’t.

How it would work:

• Initially procure bulk zero-emissions energy, shaping and firming via a long-term contract, determined via a competitive auction. The main service batteries will be able to provide is shaping, with longer-durations storage also potentially offering firming.
• Auction targets are based on each state’s long-term reliability and renewable energy targets, which together form the National Electricity objective.
• Contracts are fungible, standardised derivatives co-designed with industry (linked to recommendations for the medium-term derivative market) so they’re tradable and can be recycled back to market before maturity, minimising consumer cost and improving liquidity.
• Developers first sell near-term output into the market. For later-year revenue, they bid into ESEM auctions with a price reflecting their long-run spreads/costs; lower-cost portfolios win. These contracts are “warehoused” by a public entity and progressively returned to the market.
• ESEM tenders could value projects that bundle grid-support capabilities (e.g., grid-forming modes) where cost-effective, coordinating with AEMO/transmission operators. However, the review stops short of suggesting these services are procured through the market.

What could the ESEM mean for BESS?

The “hybrid” approach of the ESEM should preserve the spot market’s sharp signals while de-risking only what the market cannot. It also aims to improve derivative liquidity by standardising and recycling contracts. It’s introduction could have a number of impacts on battery energy storage.

• Continued acceleration in buildout. 12.5 GW of battery energy storage in the NEM is currently live, being constructed or has reached FID. The ISP sees a need for 26 GW of scheduled battery energy storage by 2035 and successful implementation of the ESEM should be an enabler of this. However, success will in turn put more pressure on price spreads in the spot market.
• The end of the CIS and easier routes to financing. 2.3 GW of BESS have won CIS contracts to date however none of this has yet reached FID. One challenge with the CIS has been the bespoke nature of contracts. The ESEM should introduce standardisation across these enabling easier financing.
• Acceleration of virtual off-takes. Long-term off-take contracts have been a key feature of battery energy storage in the NEM. By baking these contracts into the long-term business case for BESS, the ESEM necessitates the need for developers to understand this market. It also looks set to solidify the transition to virtual off-takes and away from physical tolls.
• Increased near-term market exposure. As the ESEM only provides support from a certain project year, winning projects will be more exposed to near-term market volatility than with the CIS. With BESS buildout set to increase further, there is a growing risk of suppression of price spreads in the near-term.
• Improved transparency over prices. The CIS currently provides no visibility of winning prices, but the review recommends publishing the clearing prices from successful ESEM auctions. This should improve visibility of the long-term value of BESS.

Open questions to watch

• Derivative product definitions. The exact shape of standardised ESEM contracts (e.g., four-hour firming blocks vs cap-like structures) will be co-designed by industry. That looks likely to shape who wins by technology and portfolio.
• NEO-aligned volumes. Auction volumes will be defined by the National Electricity Objective (NEO) and reliability needs. The Nelson Review highlights this principle but nothing concrete. The future market impact of the ESEM hinges on how that volume setting translates into auction sizes over time.
• Essential System Services (i.e. grid-support services) currently falls outside of any market-based recommendations, but are an increasingly critical part of maintaining reliability. This looks likely to continue to be procured out-of-market.
• Long-duration energy storage. Is the ESEM enough to support high Capex projects such as pumped storage? The panel recommends allowing state ministers to procure out-of-market reserves to deal with the risk of severe, low-probability reliability events, which suggests it might not be.
• Timing. This is a draft with “working positions” to be refined in the next phase, so specifics (e.g. exact ESEM specifications) will evolve. The consultation on the draft review is open now, with a final report due at the end of the year.

wendel@modoenergy.com