Shaking up the retail electricity market

On 6 August 2025, the National Electricity Market Wholesale Market Settings Review (NEM Review) draft report was released. Tim Nelson and the panel have carefully navigated the guardrails (and obstacles?) imposed by the review’s terms of reference. A central element of the panel’s proposed reforms involves the establishment of an Electricity Services Entry Mechanism (ESEM).

The ESEM would have four key design features.

First, a central, independent administrator would use standardised and fungible contracts to procure new bulk energy, shaping and firming services for the timeframes of a project’s operation, where project investors are unable to find buyers in the market – for example, years eight to 15.

Second, the administrator would hold these contracts until demand for them eventuates from retailers and commercial and industrial users, at which point they would be sold back to the market – thereby creating investment certainty, forward market liquidity and “supporting retail competition” (p.158).

Third, the administrator would close out all positions in a structured way prior to contract maturity. The administrator would bear the risks of financial loss or gain depending on the prices it pays for contracts at tender and the prices it receives when it recycles the contracts into the market.

Fourth, the administrator’s losses or gains from closing out positions would be recovered from, or rebated to, electricity users. 

The report describes how the ESEM will support improved price transparency, which, it claims, will drive improved retail outcomes for consumers. Greater transparency is always worthwhile, but history indicates it won’t significantly improve how most consumers experience the electricity market.

The ESEM presents another opportunity that the panel did not explore.

Although the report emphasises that participation in the ESEM would be voluntary, if the “tenor gap” is as significant as described in the report, then we might expect widespread participation in the mechanism. In other words, from year eight, the ESEM administrator could potentially own, or own the rights to, a substantial volume of the market’s bulk energy, shaping and firming services (depending on the volume of contracts it recycles into the market – see below).

The panel emphasises that the administrator would act in the long-term interests of consumers by purchasing and selling contracts through competitive and efficient processes. Nevertheless, the risk of a mismatch between the buy and sell price of these contracts remains with consumers (the fourth key feature noted above).

This means that, from year eight, consumers will be paying, whether directly or indirectly, the administrator’s contracted prices for services – regardless of the spot price. In which case, we might ask: What value-add will retailers (as we know them) have to offer consumers once the ESEM is operating?

Why not just have the administrator recover the cost of contracted services directly from consumers rather than selling all the contracts to retailers?

Such an approach could be used to support my proposed ‘inner and outer’ consumer electricity markets (see pp.209-10 of the panel’s report). This would see the administrator using its contract holdings to service consumers in the inner market who are not interested in actively trading their electricity load, production and/or storage.  Remaining contracts would be sold into the outer market. 

Consumers who are keen on actively trading (that is, shopping around their load, generation and/or storage) would be entirely free to engage in the outer market. In choosing to participate in the outer market, consumers would accept the benefits and risks of doing so. They would enter contracts with retailers, aggregators or any other form of service provider. The outer market may also see consumers trading directly in wholesale markets if the rules and technology permit such direct participation.

The outer consumer market should be largely deregulated to maximise the opportunity for innovation by service providers and consumers.

The ESEM provides a generational opportunity to shake up the retail electricity market in a way that is long overdue.

Dr Ron Ben-David is a Professorial Fellow with the Monash Business School and an associate of the Monash Energy Institute.