Redesigning the NEM's wholesale market with Tim Nelson (Australian Government)

Australia's largest electricity market is at a turning point. In the NEM, coal is retiring, renewables are growing, and consumers are taking a more active role in how energy is produced, stored, and used. But underneath all of this, sits the engine that keeps the entire system moving, the wholesale market. For decades, this has been the workhorse of the energy system, matching supply and demand every five minutes, every day. But as the transition accelerates, that market is being pushed into territory it was never designed for.

Prices are more volatile, new technologies are reshaping how and when energy flows, and uncertainty about the future is holding back in the investment required to complete the energy transition. So how do we redesign a market while it's still running? How do we ensure reliability, investment, competition, and consumer protection at the same time? And what should the next version of the wholesale market actually look like? That's exactly what the NEM wholesale market review is trying to answer.

And today, we're joined by the person leading that work, Tim Nelson, chair of the review and one of Australia's most experienced market thinkers. Tim has been at the center of energy policy, market design, and system reform for years from national market institutions to on the ground implementation in New South Wales, giving him a uniquely broad perspective on what needs to change and why. In this episode, Tim takes us inside the review, The questions driving it, the challenges emerging in the market, and the principles guiding how Australia can redesign the wholesale system for a future powered by renewables. If you want to understand how the market must evolve to support the energy transition, this conversation is essential. So let's jump in.

Hi, Tim. Welcome to the podcast.

Hello. Thank you for having me.

I mean, it's really exciting to have you on.

For anyone who's new to the, like, review of the NEM that's all coming ongoing, we'll get into those details. But, yeah, for anyone who's in in Australia and an average energy nerds, they'll they'll be well aware of who you are. But but, yeah, maybe for our sort of other listeners, can you just give a brief background of who you are, how it was that you were assigned to chair the the NEM review? But also then it's not just yourself. So who else is on the panel?

Yeah. So my name's Tim Nelson.

I've got around twenty five years experience in the the energy industry, but on both sides of the fence. So I actually started my career as a cadet graduate economist at the Reserve Bank and then fell into energy and climate with the New South Wales government in the premier and cabinet department.

Spent quite a lot of time at AGL, worked for Iberdrola Australia leading the energy markets function there. And then late last year, the Commonwealth government established this review, the review of the NEM. They asked me to chair it, and I'm incredibly lucky to have three amazing fellow panelists. Phil Hirshawn, who's a former partner at BCG, Paula Conboy, who's the former chair of the Australian Energy Regulator, and she's also on the board of PJM and the Singaporean Energy Market Authority, and Eva Hancock, who was instrumental in delivering the New South Wales energy road map. So it's a it's a it's an amazing opportunity to work with such, incredible people.

Yeah. There's, like, a huge amount of knowledge and experience, I guess, across that panel. It's you, I guess, as the chair, it's kind of been colloquially termed the Nelson Review, which is now kind of what it's, commonly known as. Just to put a time slip on it because it is obviously, you know, things are in motion, things are always changing.

So it's the nineteenth of November. I was wondering if you just give a a really quick summary of where we are with the the Nelson review, and then what can we expect in maybe the next couple of months?

Yeah. So the the review was stood up about this time last year. So the review itself, is a review to the, energy ministers collectively. So most people are aware that the national electricity market exists through state based law, the national electricity law.

And for changes to the national electricity law, all of the states that are part of the NEM and the Commonwealth have to agree to those changes.

So the Commonwealth and the states effectively asked the panel, can you go away and have a look at what the national electricity market should look like post the delivery of the capacity investment scheme with the purpose of making sure that there was a correct signal for investment in firmed renewables?

So the panel's first task was really to go away and and and kind of talk to as many stakeholders as possible. So we issued a very early consultation paper in December last year. We met with a huge number of stakeholders, you know, consultation, and collaboration with stakeholders has been a key part of the review.

We fast forward through to August, we put out a draft report. Again, we've been consulting heavily, since then. We're now at the point where we're at the real kind of pointy end of the review, so to speak. We've got to get a final report to ministers for their consideration, in mid December.

So very soon then, we should be expecting what will essentially be the final recommendations of the report. Is that right?

That's right. That's correct. So by the middle of December, we'll be putting to ministers those final recommendations for their consideration. And if and I say if ministers are convinced that those recommendations are worth doing, there'll obviously need to be an implementation program next year.

Just zooming out a bit and, I guess, going back to the start of the process, you have previously said the NEM is facing probably its most, like, challenging time since really its inception. So do you mind just breaking down what is the problem you were tasked to solve and, yeah, kind of why now?

So I think the first question is is defining what we mean by the national electricity market. So that was the first task that the panel really set about trying to to to demonstrate, which is what what what do we mean by the NEM?

And we thought that the the sensible way to do it was to utilize, the taxonomy that the International Energy Agency uses by breaking it into time frames. And so we were thinking you've got the three time frames over which the market operates. One is the the spot market, so the short term market. So the way in which AIMO operates the market, you know, day in, day out, five minute by five minutes, second by second. The next kind of time component was the derivatives market, and it's probably the most under explored part of energy market design globally.

And so that's a key way though in which risk gets managed. So if I'm a retailer, an NGOs customer, a generator, having access to risk management tools is a really important way in which I I contribute to the efficiency of the market overall.

And then the final one, which is the one which generates most of the attention is the investment signal. How do we get the right type of investment, over that investor time frame, which is decades? Not not minutes, not hours, not months, not years, but decades.

And so there were a couple of key observations we made about the change that's currently going on in the market that makes us think we might need to just tweak a few things so that we're better prepared for what the future looks like.

The first is that with the shift to affirmed renewable system, the risk profile changes. And what do we mean by the risk profile? The risk profile is a function of supply and demand, and both of those are becoming more weather dependent.

So we've always had demand that's largely weather dependent. The hottest days of the year, the coldest days of the year generally have the highest level of demand because we all put in on our air conditioners and, you know, try to cool or heat our homes.

But now we're in a world where the supply side is also becoming more weather dependent. So in very windy days, very sunny days, you've got energy abundance. When you don't have that, you've got more of a scarcity kind of issue.

Now that's not a good thing or a bad thing, it's just a different risk profile. The risk profile has changed, therefore, there needs to be tools that can manage that.

The second key thing that we observed that that would require some degree of rethinking is just the proliferation of price responsive resources in the market. And that's a great thing longer term. It's wonderful that we're able to deploy things like batteries behind the meter, giving consumers more control of their energy situation.

But because all of those resources are dynamically price responsive, that presents challenges for the market clearing efficiently. And what do we mean by that? Well, an extreme scenario, if a whole bunch of batteries discharge into the market because they were expecting high prices, The market operator didn't know about it. No one in the the industry knew about it either. You can see a whole bunch of batteries then having to come on to charge to correct the imbalance that's that's there because the operational demand forecast is so inaccurate. So those hidden resources are a wonderful thing, but it's just getting them part of of the visible kind of market so that you can get a more efficient outcome.

The next thing that we observed that probably requires a little bit of thinking through is that with that change risk profile, we need the right derivative products, the right products that can manage risk. Historically, the markets used swaps and caps. Those products were great for a system that had large, heavy, fixed cost infrastructure like coal fired power stations, not so suitable for things that are a bit more variable in nature like wind and solar. So we need to update that that derivative market suite.

And then the final one, which is the one that everyone kind of talks about is the identification of this tenor gap issue. So put really simply, buyers don't wanna sign long term contracts. And it makes sense because every day they hear about a clever analyst that tells them technology's getting cheaper, Why would you sign a long term contract if you expect prices to get lower in the future because technology is getting better? But if I'm a heavy fixed cost infrastructure investor, I've got to convince people to give me equity and debt, often hundreds of millions of dollars.

Those investors are saying we need a little more long term certainty about our cash flow, about that revenue before we're prepared to to part with our money. So that tenor gap was the the the the the other big issue that we saw needed to to to be addressed.

Yeah. And I guess that's behind probably what most people have seen out of the initial recommendations, which is the the ESEM, which we'll come on to in a bit. But yeah. Thanks for that. And so just to summarize, essentially, you know, the market, right, is is already part of way there, transitioning from one which was dominated by fueled plant, which operate off, you know, short end marginal costs, things which are, you know, more forecastable and probably more certain to a system which is more dominated by renewables and then therefore weather, but then also increasing levels of, you know, dispatchable technologies which either don't have marginal costs like like grid scale batteries or may not even be, you know, accessible or visible on the grid. And so all of that creates more risk, I guess, long term for those who are providing these kind of long term contracts. Would that be a good way to summarize it?

It it creates a different risk. And I think that's the thing that that that as a panel, we're trying to emphasize that it's not more risk, it's not less risk, it's just a different risk profile. And with a different risk profile, you just need to make some tweaks so that that risk can be managed most effectively. Probably the easiest way to kind of, demonstrate what this looks like is that if you compare what electricity demand looked like, say, in twenty ten and compare it to what it looks like now, the first thing you'll notice is what we all call the duck or the EMU curve in the middle of the day, the proliferation of twenty five gigawatts of small scale solar, what a wonderful thing to see in the grid, people taking control of their energy situation.

But by definition, if there's twenty five gigawatts available in the middle of the day that's not there in the middle of the night, you can see that straight away, you've got a much more variable demand than you had, say, fifteen years ago. And when I say variable demand, variable grid demand. And so the types of resources you need to complement that that that on-site generation change.

And so, really, it's about making sure that the the market, the way the market clears, it's the visibility, the derivative products, they're just fit for purpose. So it's a case of, you know, recommending, a bunch of and again, I'd say they're evolutions. They're not revolutions to the market so that you've got the the fit for purpose products and services.

So I guess these problems aren't unique to Australia. They're not unique to the NEM. So I guess within this process, how much have you looked to other markets? Other market reforms, like I'm well aware of a few happening in Europe, either for inspiration or maybe on things to avoid?

So we've met with a lot of people from around the world. So we've met with many of the market operators in the US, in the UK, parts of Europe, parts of Asia, New Zealand, and we keep coming back to the fundamental proposition of the market design is not really the thing that everyone's talking about, it's these other issues that require you to think differently about the risk profile. And so the Tanner gap is probably the best example of that. So when it when this review was announced, straight away, we heard people talking about, oh, should we have an energy only market or should we have a capacity market?

When we spoke to people who have capacity markets, their simple reaction to what we were saying was that, well, we agree. It's not the market design, it's the tenor gap. It's the fact that if you have a capacity market, unless you've got fifteen or twenty years of certainty from that market, it doesn't overcome the fundamental problem that investors have, which is buyers not signing long term contracts and being a bit worried that in the future, technology will evolve and that might make their investments less economic than they would have been otherwise. So the international experience in in in our mind really confirms that you have to go to what the the the way in which the the physical technology and the societal use of energy is changing, and then consider what are the things you need to tweak in your market rather than fundamentally redesign it.

One participant from a market overseas summed it up really well to us when they said, once you've picked a market or a market design, probably the better thing to do is to stick with it and make the necessary changes to it to make it more efficient given all of those other changes because no particular market design that, yeah, people were thinking about thirty, thirty five years ago was actually anticipating this type of of technological revolution. And it's the technological revolution which has changed the risk profile, which again, yeah, it leads you back to tweaks rather than than than revolution.

Because that was definitely something the review landed on, which was essentially to look at evolving the market rather than revolutionize everything.

Don't yeah. No need to kind of move entirely to a capacity market based system. And so yeah. So I one of things I've been really impressed by is the speed at which the review has progressed.

But also throughout that, the level of public engagement. And so I was just wondering how much has that been a kind of core part of what you and the panel have focused on on bringing? Was that something which government and industry have been supportive supportive of?

Oh, absolutely. So early on, we sat down as as the four panelists, and we thought, what what do we want this review to achieve in the sense of the how? Not so much the what. At at the end of the process, what do we want people to say about the review?

And and the first thing that we landed on was open and transparent, collaborative. That's kind of what we wanted. And there's a really simple reason for that, that this this industry is full of really, really smart people. There are really smart people on the investor side, on the generator side, the retailer side, the end use customer side, and we knew that we would get a much better outcome if we invited people in to share that knowledge, share that wisdom and experience.

And we learned a lot along the way, and we had to leave behind our own long held views. And probably the best example of that is that, you know, for those that have followed my academic work over the years, they'll know that I've been on the record in many of my academic papers saying that if you just expand a renewable energy certificated scheme, you'd get a a really good outcome. But what became clear in talking to investors and and end use customers and other participants that the tenor gap can't be solved by that particular policy approach.

So we had to pivot. We had to think, well, what what's the answer to this particular problem and leave behind some of our our preconceived ideas at the at the at the door. Now, the only way we're ever gonna be able to do that was to open up to the outside world, welcome people in, and and work with them to try and come up with the best answers to the problems that we were able to jointly identify.

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So we see as the four of you on the panel, but then underlying probably any sort of review work, there's a lot of modeling, a lot of analysis that needs to happen.

Where does the panel get support from? Is that from essentially the engagement from industry and from, you know, government?

So again, we were really lucky that because we went on on that that that down that pathway of really wanting to engage, industry came to the table. So we were presented with some amazing quantitative modeling. We were given access to data that that that, you know, is not commercially available to other participants. So, you know, IP that organizations held that that they provided to us with the view of helping us and us obviously holding that confidential information very closely.

But governments themselves provided quite a lot of resourcing, so we were very lucky that the Commonwealth stood up a bunch of really bright people in the department down in in Canberra. The New South Wales government, the Queensland government leaned in and provided us with with access to resources.

Same thing with AEMO and the the AAR. So we were very lucky that people really leaned into helping us collectively model things, analyze things and and and look to understand what some of the issues were.

We've been meeting with with each state, and the Commonwealth, you know, probably every couple of weeks since the beginning of the review and we've tried to emphasize that yes, we're an independent review, but there's independent to the point where you go into a room for twelve months, beaver away on your own, come up with something and then kind of present it to the world and the world says, where did all this come from? We haven't had any input into it.

And then there's the other end of the spectrum which is, you know, more or less just doing what everybody else kind of tells you.

We're trying to walk that fine balance of listening, responding, collaborating, but making sure that where there are difficult decisions to be made in terms of recommendations, we're still putting those forward.

I I think definitely for us at Modo's of it's quite recent experience of Rima in the UK and sort of the process behind that, which I guess does feel a bit more like it was the form of that. So was kind of a decision that sort of gone away and then actually that gap just created uncertainty and you had all this kind of politicking and sort of commentary going on for months and months and months before a decision was made. So so by contrast, feels like kind of the transparency and and the speed at which this has progressed has actually just helped quell any of that, I don't know, sort of negative reaction that can come from, especially from industry because ultimately, you know, things affect, you know, private investment that has been made.

I I think that's right. And and and and we know that there are there are elements of what we put forward in the draft report that that some in industry are not as happy about as as others. So, yeah, the market making obligation, for instance, we know that there's a bunch of people who think that that that's not as necessary as say the panel thinks it is. But we think it's important to to put that forward and to be very fair to to all the participants in industry where people have disagreed with what's in the draft recommendations, throughout the second half of our review, no one has engaged in bad faith.

No one has turned up and said, well, we disagree with this completely, so we're not even gonna work with you on it. We're just gonna, for use of a better term, campaign against it. People have lent into, you've identified a problem, the solution you've put forward, we think could be improved, so we're gonna try and help you improve it rather than try and debate whether the problem exists in the first place. And the best example of that, I say, is the MMO where everyone acknowledges that the the the lack of liquidity in South Australia is a big problem.

It's a big problem.

But no one has has fronted up and said, well, therefore, we shouldn't do anything about it. People have different opinions on what to do about it, but they've lent into the the the challenge of trying to to work with us on what a good market making obligation would look like so that it achieves the outcomes of, you know, accessible, transparent, liquid, but is not unnecessarily onerous. So again, we're very thankful that that industry, consumers, investors, everyone has has really engaged in good faith. We've been very lucky as a panel to have that.

And I guess something that's also helped was, I guess, the quite early decision to to not revolutionize everything. It's a sort of take what works well with the current market, but just, you know, reform it where needed.

I guess with that in mind, could you just give a very quick high level summary of, you know, what is the the fundamental of of how the NEM operates? And also, I guess, what's the role of derivatives in the reserve contract market in that? Because I think, like you said, that is probably slightly underestimated by many, but it is core to what the review is really proposing.

So the the the the NEM's predicated on this energy only market design. So if I generate energy, I get paid for that energy uniform clearing price. So whoever is the last unit to set that price that's required to meet demand, that's the price for everybody.

We don't have an ahead market. We don't have a capacity market.

Now, historically, there probably were reasons to have debates around ahead markets and these things. But in a world where you've got resources that respond in the millisecond, long dated ahead markets probably don't really give you any benefit at all because you need things that can respond instantaneously very, very quickly. And and batteries are the best example of that. The the the change that batteries bring really does in our mind, you know, solidify why an energy only market is such a a good design.

And again, different people have different views on the volatility that comes with that, but volatility is a really useful way of getting the right decisions being made by things like batteries.

So if you've got quite a wide spread between the price that I can charge and discharge, that means that I've got to really acutely think about when's gonna be the best value to the system for me putting in my battery offers for charging and discharging.

And again, we we we go back to kind of why would a capacity market, you know, kind of deliver any benefits or or not. The fundamentals are we do have a capacity market, it's just decentralized.

So if we contrast, say, a classic centralized capacity market, you've got a a market operator that says, we think we need this much capacity, we'll do an auction for that, people get remunerated. Now if those if those generators or demand resources that that get remunerated to provide capacity then don't show up, straight away, you're in a legal argument. Did I have a force majeure? What was going on?

In in the market that we have here in Australia with the national electricity market, the energy only nature of it means that people manage risk using those derivative products. And the best capacity market kind of analogy is really the cap market. So the market for a particular type of derivative product, which is effectively managing the risk that prices will be between three hundred in the market price cap, which is currently around twenty thousand dollars.

So if I've forward sold a whole bunch of cap contracts, and then for whatever reason, I don't show up in the spot market when prices go really high, there is no force majeure. There is no, oh, I'm really sorry. I I didn't provide that. No. No. You have to settle on that contract, and it can be quite a significant financial penalty.

In our view, given the dynamic nature of the market with five minutes settlement and resources that can respond in the millisecond, we think that that market provides the right signals to deploy the right resources at the right time, but a critical assumption and therefore something that we need to be on top of is that derivative products are available for people to manage risk. Because if I'm an end use customer and my demand can fluctuate, the only reason I would ever be supportive of that type of market design is if I can access the right types of derivative products. So the the the package of reforms we've put forward really speak to try to identify what risks there are, how those risks are changing, how do you mitigate those risks by making sure you got the right products available, and critically, how does the long term investment signal tie back into those other two time frames? Because at the moment, they're somewhat separated.

Yeah. Definitely. Yeah. So we'll come on to the SEM in a second. I guess so if we look at the yeah. So I guess the spot market and the derivative market and everything kind of plays into that. What were the particular, I guess, weaknesses that were highlighted that were in need of some reform?

So there's probably a few things. One was we we identified that the the the changing nature of technology presents a few risks to the market, and and and I'll give you one example of one of the draft recommendations was in and around auto bidding software. And the the potential for AI and machine learning to effectively allow for things that regulators may find a bit challenging. So things like, you know, collusion and other things where you've got machines talking to machines.

But a really good example of stakeholder feedback that we had was, you know, they're not just risks. They're significant opportunities that come with that that level of kind of granularity and sophistication of software.

So, you know, our recommendations there are evolving to rather than just looking at the risks, what are the opportunities as well?

Making sure that the regulatory architecture keeps pace with the technology change so that we get the best outcome within that market design.

The visibility one was another big one. You you you can only get the right outcome in the wholesale market with the current design we've got if resources are visible.

But again, we heard loud and clear from people after the draft report that our thinking around dispatchability rather than visibility was probably a bridge too far And in the first instance, what was more important was visibility. So, again, we keep coming it back bringing it back to the actual fundamental of the spot market design is probably okay, but there are these little tweaks we need to make to ensure that as the technology evolves, you've got the right underlying settings to get the best outcome out of that spot market.

And so two of the kind of critical things in that are in place in terms of managing the volatility in the spot market, because like you said, it's energy only and it can get hugely volatile. So there's the the market price cap, and then there's also kind of the administered administrative pricing that can kick in if a cap is hit. Does the review kind of see that currently as as fit for purpose long term, or are there reforms of that or maybe suggestions on how that could change in the future?

There there's a real kind of need to be more future, you know, future looking or forward looking in in the way in which we think about those settings. So there's two key recommendations that we've made that really need to be thought about concurrently and and thought about as as as processes that you'd run concurrently.

The first is we think that the the reliability panel, which is the panel that's required to determine what those market price settings should look like, rather than it just providing a a short term view of, you know, next couple of years view on the market price cap, the market price floor, the administered price, and also the very important cumulative price threshold, that that kind of that that aggregate amount of risk that the market can bear before you move to administered pricing.

We think that it needs to take a longer term view on the form of those settings, not necessarily the values, but the form. And what do we mean by the form? Well, at the moment, we just have a single market price cap. So it's the equivalent of eight hours at twenty thousand dollars and then it moves to administered pricing.

The the question which we've we've we've asked in the report is in a future where you've got very different resources providing very different services, no longer just a marginal unit being a gas turbine, like we used to think about things maybe ten years ago.

Do we need differentiated market price settings for different conditions or whatever it might be? But as a panel, we've said it's really inappropriate for us to provide a view and fix that in stone. Let's use the existing architecture, which is that market price setting, you know, kind of process with the reliability panel. Let's get that regularly every, say, four years, providing some guidance on what that long term kind of form of those price settings looks like.

But then a very much related, and we think it should run concurrently, is this contracts co design group. So once you know what the long term market price settings look like, a key challenge will be defining contracts that provide the right incentives for new entrants. So whether that be bulk energy, you know, wind and and solar or shaping, which is, you know, batteries and and hydro, and then firming, which might be demand response, it might be gas turbines, it might be other forms of, you know, very deep storage.

So those contracts have to be fit for purpose for managing the risk associated with the spot market, but it's also very useful to make them useful for having a forward looking view about kind of investment certainty.

And so we think that those market price settings that effectively look at the distribution of risk under those those long term contracts become a really useful way of concurrently considering what the right balance is around those market price settings for driving investment and managing risk.

Speaking of those kind of contracts, because I think, obviously, that's core to then that long term kind of investment mechanism, the eSIM. So, yeah, so what are the changes that are recommended there? You kinda touched on a few there.

The first thing with the eSIM is to note that we think that we should evolve, not revolutionize what's been done to date. So at the moment, we've got the capacity investment scheme and we've got the the El Tessa framework under New South Wales, the New South Wales Energy Roadmap.

Both of those policy approaches are new entrant forms of policy and they're both designed to provide some degree of revenue support through a long term underwriting contract.

So we thought, well, if that already exists and people know how they work today, let's not throw that out. Let's let's utilize that. You got a whole bunch of architecture that already exists. But what are the ways that we could improve it by tying it back to managing spot price risk?

Because the big shortcoming of any revenue approach is that if the counterparty has no natural position to manage in the spot market, you've removed a whole bunch of energy and capacity from the ability of the the market to solve that risk.

So we sat down and thought, okay, so you'd need to have some form of derivative contract. Now, historically, derivatives have been swaps and caps. The next thing we thought is we'll look as a panel. We don't wanna kind of, again, set this in stone forever and and have elaborate processes for for changing it in the law.

Why don't we use the expertise from industry? So we we we we let we landed on this idea of having a contracts co design process. So effectively requiring industry to come together, and when I say industry, I'm not talking about just the supply side, I'm talking about end use customers, retailers, investors, financiers, get everybody into a room and say, are the contracts that are useful for managing risk in the spot market from the new types of electricity services we're seeing? And so we defined bulk energy effectively being the megawatt hours that we all need to to consume, the shaping being the mismatch between when we wanna consume it and when it's available, and then the firming effectively being the the long kind of continuous dispatchable capacity that you you need sometimes to get you through, you know, the scarcity times of of renewables and storage.

And we ran that as a pilot process. So we thought, well, let's let's not just kind of put that forward as a draft recommendation, let's test whether it works.

So we invited a whole bunch of those those participants into a room. We held four different, workshops across kind of five or six weeks.

We started with the proposition that it is is absolutely doable to get those contracts defined. And I think it would be fair to say that most participants really lent into that challenge, you know, can we define these types of contracts?

Within six weeks, we were able to define some contracts that worked for wind and solar, some contracts that worked for shaping and some contracts that worked for firming.

All of those were thought to be useful for managing risk in the spot market, so meet that derivative market definition of they're standardized, they're fungible, but they're useful.

But then the other thing that we were able to demonstrate is that they could be used to finance new investment over those longer term time frames.

So we think that by embedding that that process into the the national electricity law and the rules, every few years, you get industry to regularly check-in, define those products, make sure they're still fit for purpose, and they probably will be and they will endure, but you wanna kinda regularly check-in and make sure of it. And then you're very well set for this this eSIM to utilize those same products to underwrite or to to derisk temporarily the the revenues of some of those, new entrant projects.

On the eSIM, so, yeah, this is the tool that the review recommends really to solve that thing you mentioned, the tunnel gap. So, yeah, can you just briefly summarize how how does it do that?

So let's let's just use a practical example because I think that's the the easiest way forward. So we think that the the the best way of doing this is to have an in market period of of no less than three years. So what does that mean in practice? Let's say I wanna build a wind farm. So I go along and I try and find a customer that's prepared to buy the energy out of that wind farm for three years after it's COD. Now, I might choose to run it merchant, I might find an industrial customer, a commercial customer, a retailer, but the the requirement is that for the first three years, you'd you'd you'd have that in market, contract.

Then you would go through a reverse auction process in the same way that people go through the CIS or the LTSA today. By using the derivative contract, I put forward a single price for each of those years into the future, The ESEM administrator, the the scheme administrator that's administering this scheme has a really simple comparison point. Is my price cheaper than the other wind farms? And if I am the cheaper one, then I'll get my contract away.

So then I've got this this this derivative contract which I've sold into the the ECEM administrator.

Now, at any point, I can choose to buy those contracts back at the prevailing price that that that exists in the in that that market. So I'm not locked into a revenue strategy. I can choose to buy them back and then sell it as a PPA or I can sell it as a some other type of bundled contract. Whatever I choose to do, I've got some, some control of that over time because I can buy it back.

But the ESEM administrator also has the ability to offset that position by selling derivative contracts to the participants that naturally need them. And what do I mean by naturally need them?

Retailers, end use customers. They need to manage the risk of their consumption in the spot market, so they need access to those those derivative products. So all we've really done is we've temporarily warehoused that risk. That risk has been taken out of the market temporarily by the ASEM administrator, but then at the time in the future where there's a natural demand for those products, the risk returns to market and and is best managed by those participants who understand it most.

And so within that, the obviously, one of the key things then would be the ECM auctions and then how often they run, but also what are the kind of parameters that are going into it in terms of how much these contracts are being cured. So what is set out at the moment, I guess, for that?

So in the final report, there'll be a little bit more detail. But but again, because we've been so regularly consulting with particularly the the peak industry bodies, We've learned a lot and worked with them about how we think this should should work.

The first thing is we'd say that we think that that these processes should be pretty frequent. And the reason we think that that's important is that we wanna create competition across rounds, not just competition within, these processes. Because that's really important. It's really important that we're not just signing up lots and lots of supply in one period and then nothing for five, you know, kind of periods, and then you compare it to something in the future which is way higher or way lower.

You wanna try and create that that constant kind of competition and competition across rounds. But by doing it really frequently, we think that that better fits in with the time frame of investors and developers. So if you've got all of your approvals, you've got everything done that you need to do, you've got your investors ready to give you the cash to go to FID, What's not helpful is that if you have to then wait for six months till a round open opens up. So let's try to get these things happening fairly frequently.

You're getting price transparency because you're seeing the weighted average price or the curves published into the future, so you've got to know whether there's value that's being, had or not. Now, the anticipated trajectory that you need in the future is guided by a few things. The first is, is demand gonna grow for that service? So is demand going up or is demand going down?

And we know that the market operator and others are really good at forecasting that today. Sure, it's not gonna be right in ten years' time, but we think that, you know, there is a need to publish that that anticipated trajectory of demand.

Then you've got the anticipated trajectory of existing supply. So we're now in a world where there'll be supply coming out of the market, not just aging coal fired units, but you'll also have the very first of the wind farms coming out of service or being repowered, whatever it might be. So you're gonna have this growing demand, this falling supply, and therefore, you've got this gap. The other thing that you have to overlay on top of that is jurisdictional requirements for specific amounts of decarbonized energy.

And so we've made it very clear that the anticipated entry trajectory needs to give effect to state government requirements. So in Victoria, for instance, that's ninety five percent by two thousand thirty five, I think it is. So it will build into its procurement thinking or its anticipated trajectory that kind of level of renewable investment. And we think that by by providing the market with all those parameters, by creating that frequency of processes, the transparency of comparing prices not just within a round but across all rounds by publishing long term curves, we think that that gives the market a lot of faith and a lot of transparency, not just to go with single projects, but to build portfolios because then they've got this process that they can constantly lean into to build new things, build new projects that are required to meet that growing demand.

I mean, I think that's definitely something that's missing probably from the current, like, CAS and our test process is that transparency over what is the value of that in the future? What are the prices that are coming out of those auctions? So that's something I'm really keen to see out of these, and I think that's something that I think that will make a big difference.

But when you mentioned that, obviously, it's reliant on, you know, these forecasts in the future, obviously, there was uncertainty there. On the main demand side, for example, you have all this uncertainty on data center growth.

So that does create a risk then that maybe there could be like over procurement or contracts or under procurement.

Where does that risk sit? So we think that that's where the risk is warehoused effectively temporarily.

We think that that risk of over procurement is mitigated by the in market period. And we think it's really important that that in market period, even if it's only three years, it it just applies a bit of discipline to project proponents to, well, now this is not just about having a central government underwriter kind of kind of taking all the risk off the table. It's effectively saying, try to find somebody who thinks that this energy is required for the first three years. So it's a it's a way of mitigating that risk.

The second thing is that the two key risks that we see that are systemic and therefore unable to be managed by anyone are technology and demand. So to your point, demand, we've seen credible forecasts that show demand going way, way higher. We've also seen credible demand forecasts that show it going lower because of improvements to energy efficiency and, you know, the one thing that we all know is is that things do get more efficient over time. So where that lands is a degree of uncertainty.

The other one is technology. So we know that every day people kind of come up with new and better ways of producing energy at lower cost. So the two key systemic risks that no one is well placed to manage is demand and technology. And so the the idea that we've got is is that we enter into these long term contracts. Now, if those contracts are closed out at a loss, the idea is is that that those costs would effectively be recovered from all electricity consumers.

In that world though, and this is a really important, point to make, that because the eSIM is only looking at new investment, it's not looking at the entire market, consumers would actually be better off in that world because the overall wholesale energy price would be lower.

Now that's not necessarily a good or a bad thing. It's just a function of the the nature of technology and and markets and change.

But we think for those new entrant investors, those two key risks of technology and demand are the two key risks that need to be temporarily warehoused. And that's kind of the the the the concept of overcoming the tenor gap, basically.

Could probably talk about it for quite a long time, but in interest of time, I think one thing that really pops out to me, you mentioned sort of separate to these was this idea that, yeah, obviously, the future, there's increasing amount of essentially dispatchable capacity that won't be visible, not least because, you know, in the last six months, we've seen this extraordinary take up of the household battery scheme. And so with what's proposed, like, how do you see like, from the consumer sides, how's it tally with what they want, I guess, the average consumer?

So one of the the chapters that that we provide observations and not recommendations is that the final chapter which talks about how does all this kind of land for the the the end use customer. And there's a a few things that are in there that are worth thinking about. The first is that we think that by making sure we've got the right risk management tools, consumers can get more certainty. So rather than seeing one year, the price go up and the next year, it goes down and then it goes back up and then it goes back down, we think this is actually a really kind of useful way of providing certainty for customers over a several years, which we know that there are some customers that are gonna want that.

The second area where these, I guess, suggested reforms would make a a big difference is lowering the overall cost, and we get that by a more efficient capital mix. So if we get the right visibility, we can lower cost for everybody because you need less resources. The more visible everything is, the less overall resources you need.

Now for an individual household that installs those resources, though, there's probably a couple of key things to note.

The first is that if they're like me, I do have a battery and I've got a solar system, but I'm one of those people who just set and forget. So I solar soak during the day and then I use my battery overnight, and most most days, I'm fairly self sufficient.

But more and more, you're getting people who see that there's a great opportunity to make a little bit of extra money by delivering more services to the market, acting as a substitute for the large scale system. So these are the VPPs, the price pass through models, the trading models. I think the critical thing that that that our recommendations would do is they would enable those platforms to extract even more value, not just for the individual consumer but lowering costs overall because the visibility means they can be more efficient. So when they're discharging or charging, they're doing it knowing with much more precision and certainty that the operational demand forecast is gonna be right, that the price forecast is more likely to be right because you've got the, you know, the the right information in the system.

In terms of whether customers pick VPPs or whether they pick the type of arrangement I'm on, different customers will have different preferences.

But we know there's lots of new entrants, competition is a wonderful thing. If we get the right risk management tools that allow people to bundle these these types of products and services, we get the right types of risk management that can be done over multi year, we think that you'll get a lot more engagement, you'll get much higher net promoter scores, the industry will see much greater trust levels because you'll be in a world where you've got the right tools for managing risk on behalf of customers and the tech gives customers so much more control based upon what they wanna do. So again, you know, it's probably not gonna happen overnight, but with the right tools in place, we think that this should really improve the outcome for consumers longer term.

Awesome. And I definitely have more questions I could ask, but I think we probably have to move towards wrapping up. I think the final one, so obviously, you mentioned so mid December expecting to have that final review out. I guess once that's published, what is next? And I guess what are the timelines for things like the eSIM?

So as part of our terms of reference, we're required to publish an implementation roadmap. In that implementation roadmap, we're putting forward a timeline for what we think the various steps for giving effect to this might be. So things like passage of legislation, passage of rules, running the contract co design process, all those things that we've spoken about. So once once that road map is considered by ministers, we think that there's no real reason that you couldn't have all of this up and running by the end of next year or the beginning of the year after. Now, lot of people will say, woah, that's very ambitious. But the observation we would make is that you don't need a whole bunch of new people and skills in the regulatory world.

The people who run the LTSA and CIS frameworks today already exist. So pivoting them from doing one thing to doing something else doesn't necessarily result in a whole bunch of extra activity or cost. The AAR already exists, so pivoting it from being kind of focused on the MLO to the MMO, again, not a lot of extra cost.

So we think that this could be done reasonably quickly.

We're not getting ahead of ourselves though. We we we know that ministers will think deeply about these recommendations and whether they are in the long term interest of consumers.

But ultimately, we think that if we can do a good job in demonstrating to ministers that these recommendations are worth supporting, then we think that there's there's nothing stopping this all kind of being done relatively quickly. Because the one thing that we do know is we need lots and lots of investment. We need the right rules and and and systems and processes to facilitate that investment because we all wanna achieve the same thing, which is least cost supply in our electricity system whilst meeting those those decarbonization goals that that the individual jurisdictions, and we all believe in.

Awesome. I mean, like I said, that yeah. That's one of things I've really been impressed is the speed at which just this whole thing has progressed.

So, yeah, fingers crossed, and that continues once the final review is out. So, yeah, just wrapping up now. We've kind of got two questions we also ask every guest. So the first is, would you do you have anything you'd like to plug?

Yes. I will selfishly plug something that, a colleague of mine at Griffith Union and I do, Joel Gilmore. So, Joel and I, came up this idea of running this program called energy economics for non energy economists.

So every year, we try and do a session in Brisbane, Melbourne, Sydney, Adelaide, and we're now doing one in Hobart. And to register for that, you pay fifteen hundred dollars, but all of the money goes to Saint Vincent de Paul. So we've raised several hundred thousand dollars so far for for Vinnies, who do amazing work for vulnerable Australians and are one of the major contributors to the policy debate when it comes to electricity. So shameless plug to look out for invitations to come along to that. It's a great way to learn about energy economics, and it's a great way to to give back to charity as well.

And we can definitely include a link to that in our show notes, I'm sure. And so final question, Tim, that'll be interesting here. What is your contrarian view?

The contrarian view I have, I think, comes down to the pessimistic view that things can't be done quickly. I think that at every point in the last twenty five years when people have said, oh, no, you you won't be able to do it this quickly. Not only has the industry and consumers overshot it, they've overshot it often by a long way.

So I think the contrarian view that I would have is can things done be done quickly? I think they can. They require a lot of things to go right though, and that's where we don't have a lot of time. So I would appeal to sense the sense of optimism, not pessimism that with the right regulatory settings, with the right will, and with the right leaning in by all stakeholders, which again, we've been very lucky as a as a review to to have, I think we can get there, and I think the contrarian view in me says that, you know, let's lean into the challenge and accept that we probably can do more than we realize.

I think that's a great one. I I would probably agree with that.

Awesome. Well, Tim, thanks so much for joining us.

Thank you for having me.

And, yeah, thanks everyone for listening.