The ESEM and what it would change for project contracts

The NEM Wholesale Market Settings Review, chaired by Dr Tim Nelson, released its draft report in August 2025 and its final report on 16 December 2025. Its central recommendation is a new central procurement mechanism, the Electricity Services Entry Mechanism, or ESEM.

What is proposed

The ESEM is a hybrid of centralised and decentralised procurement. A central buyer would run reverse auctions and issue long term offtake contracts for zero emissions energy, together with shaping and firming services. It is intended to replace the current arrangement, under which projects reach financial close through a combination of the Capacity Investment Scheme, state schemes and bilateral power purchase agreements.

The problem the Review identified is a tenor gap. Capital intensive generation and storage projects typically need revenue certainty over fifteen years or more to support project finance. The corporate and retail offtake market has generally been unwilling to contract for that long. The ESEM is designed to bridge that gap by putting a creditworthy central counterparty on the other side of a long dated contract.

Where the timetable sits

Energy ministers have agreed to an accelerated process. Feedback from consultation is intended to shape amendments to the National Electricity Law for consideration by energy ministers in December 2026. On the timetable published with the final report, the first ESEM contract tender would be held by the end of 2027.

That is a short runway for a structural change to how generation and storage is procured in the National Electricity Market, and the detail that matters most to project documents, including the form of the ESEM contract itself, is not yet settled.

The contracting questions worth asking now

• Interaction with existing offtake. Projects holding a Capacity Investment Scheme agreement or a state scheme contract will need to understand how an ESEM contract would sit alongside or replace it, and whether existing documents contemplate that substitution.
• Bid conditionality. Reverse auction processes generally require bidders to demonstrate deliverability. That pushes connection, land tenure and construction pricing earlier in the development timeline than a bilateral negotiation would.
• Change in law. Contracts being signed now will run into the new regime. Change in law and regulatory change provisions drafted against the current framework may not allocate the risk the parties think they are allocating.
• Financier requirements. Until the ESEM contract form is published, lenders cannot assess it. Projects targeting financial close in the interim will continue to be assessed against the existing suite.
• Shaping and firming. If shaping and firming is procured centrally, the commercial case for some merchant storage and hybrid configurations changes, and so does the analysis of what a project is actually selling.

The practical position

The ESEM is a proposal, not law. National Electricity Law amendments have not been made, and the contract form has not been released. Projects reaching financial close before the first tender will do so under the existing framework.

What can usefully be done now is narrower: check that change in law drafting is fit for a known structural reform rather than an unknown one, and confirm that offtake documents being signed today can accommodate a successor contract without requiring the consent of every counterparty to the project.

Sources

• DCCEEW, National Electricity Market wholesale market settings review
• Energy and Climate Change Ministerial Council, NEM wholesale market settings review