Professor Tim Nelson, who previously served as the chairperson of the National Electricity Market (NEM) Review Committee in Australia, has urged energy storage system developers and market participants to actively participate in the implementation of comprehensive market reforms. These reforms aim to address the “fundamental shift in the Australian power system from fuel storage to energy storage” as described by him.
The core argument of Nelson’s speech is that the electricity system in Australia has undergone a structural transformation, and the existing market mechanisms were never prepared for such a change from the very beginning.
On March 18th, Nelson delivered a speech at the 2026 Australian Energy Storage Summit held in Sydney, elaborating on how the National Electricity Market (NEM) of Australia will shift its focus from policy design to actual implementation. Currently, key processes are underway, and these processes will determine how battery storage projects will obtain financing and participate in the derivatives market in the coming decades.
Nelson stated at the meeting: “The review of the Australian National Electricity Market (NEM) no longer exists. However, there are still some interesting insights in this speech, and we hope they will help everyone gain a deeper understanding of the subsequent work.”
The core argument of Nelson’s speech is that the electricity system in Australia has undergone a structural transformation, and the existing market mechanisms were never prepared for such a transformation from the very beginning.
The Australian National Electricity Market (NEM) was established in 1998. Its operation model relies on pre-storing fuel in the coal bins of coal-fired power plants and in the gas pipelines. In contrast, the operation mode of modern power grids is to generate electricity first when the weather conditions permit, and then store this electricity in energy storage systems.
Nelson explained: “In the new system, power generation takes precedence – as long as the fuel (i.e. wind and sunlight) is available, power can be generated first. As a result, the sequence is completely reversed: the energy will then be stored in various energy storage systems, including battery storage systems, pumped hydroelectric power facilities, and other energy storage technologies.”
Nelson believes that this reversal implies that financial contracts must constantly evolve, not only to manage variables and demands, but also to manage the variable supply of electricity.
He added, “The most important thing is that financial contracts need to constantly evolve to meet variable demands, because demands are still variable. For instance, the electricity consumption from 6 to 7 p.m. might be higher than that at noon. At the same time, we also have to deal with fluctuating supplies. Managing such fluctuations requires thinking about risks in different ways.”
Just as the Australian National Electricity Market (NEM) review committee has pointed out, the mismatch in maturity between buyers and sellers in the derivatives market has been hindering the financing of energy storage projects.
Nelson said: “If one wants to secure a bank loan for a large-scale energy storage project, the bank requires the developer to provide some form of guarantee, demonstrating that the project has a long-term revenue plan and revenue contract. However, buyers and retailers stated, ‘Every year, someone tells me that it might be cheaper next year and the year after. So why should I sign a long-term contract? ’”
This mismatch has compelled the Australian government to intervene through measures such as the “Capacity Investment Plan”, but Nelson emphasized that it is crucial to seek a more sustainable and market-based solution.
Currently, the Australian Energy Market Operator (AEMO) is conducting contract joint design work through the ASL (formerly known as AEMO Services) company. The application period is about to close, aiming to develop standardized financial products suitable for the power grid.
Nelson emphasized that this is a crucial opportunity for all participants in the energy storage industry to engage in the formulation of contracts. These contracts will directly support the liquidity of the derivatives market and long-term investment decisions.
He said: “The intention of having ASL handle this process was to leverage the expertise of industry professionals, rather than having the government directly determine the contract format.”
This process does not involve the government setting the contract structure. Instead, it integrates the professional experience of the power purchasers, sellers, power producers and retailers to determine the most suitable risk management tools.
The cases discussed at the meeting included variable renewable energy products applicable to large-scale solar and wind power, standardized virtual tolls for energy storage systems, and upper limit contracts for peak-shaving power generation facilities.
Nelson defined stable capacity as “resources that can be continuously allocated to cope with the market price ceiling”. He noted, “Currently, the market price ceiling is approximately 20,000 Australian dollars (about 14,213 US dollars), and once this price persists for about 8 hours, the government’s controlled pricing mechanism will be triggered.”
The long-term market pricing guidance issued by the Australian Electricity Reliability Commission provides information basis for the joint design of contracts, and this contract design in turn supports the proposed electricity service access mechanism (ESEM).
Nelson said, “After the draft was released, we received clear feedback that the originally planned 1 to 7-year cycle was too long. Therefore, the cycle in the final report has been adjusted to 1 to 3 years. This adjustment is very crucial because both buyers and sellers need to ensure the smooth progress of the project during the market cycle.”
Nelson outlined several paths through which developers can participate, including directly holding the contracts for access to the electricity service mechanism, returning the contracts to the market to exchange for physical power purchase agreements, or integrating the physical power purchase agreements through intermediaries into a financial asset portfolio.
In response to concerns that this mechanism might force developers to become experts in derivatives, Nelson said: “That’s absolutely not the case. The advantage of our proposed solution is that, based on their own risk tolerance, they can choose various methods to implement the project.”