Response to the ESEM contract co-design consultation

The Clean Energy Investor Group (CEIG) provides feedback on the contract structures for the Electricity Services Entry Mechanism (ESEM). CEIG represents domestic and global renewable energy developers and investors, with approximately 18GW of renewable energy capacity in the National Electricity Market (NEM) across 139 power stations. The group’s members have a combined portfolio value exceeding $41 billion and a project pipeline estimated at more than 150GW across Australia. CEIG advocates for an efficient transition to clean energy, supported by low-cost capital from investors.

Regional reference PPA (RRPPA)

CEIG strongly endorses the Regional Reference PPA (RRPPA), noting that it is fungible, tradable, and achieves a sensible balance between seller and buyer risk. The use of a reference production index based on a weighted average of generation from a specific technology fleet in a region provides a firmer shape for buyers than individual projects. CEIG supports separate solar and wind-specific reference fleets to provide adequate hedges for their different generation shapes. The indexed settlement is considered superior to the fixed-volume obligations of DWA swaps, which pose bankability risks for weather-dependent assets. Effectiveness of the RRPPA will depend on sufficient fleet depth to produce stable indices.

A spot price cap of $600/MWh is supported to manage extreme basis risk exposure and support bankability. This cap should align with the firming product strike price to maintain risk symmetry. CEIG prefers a $600 cap over a $300 cap, as the higher value increases the contract’s appeal to buyers and supports project revenue security. Furthermore, a negative price provision is deemed essential, with a preference for a $0 price floor. To avoid market distortions during negative pricing, CEIG suggests using the Unconstrained Intermittent Generation Forecast (UIGF) as the index volume basis instead of actual dispatched generation.

Regarding index design, the NEM regional level is considered appropriate for most areas, though Queensland and New South Wales may require further analysis of within-state variability. The index should include all generators above 30 MW and feature a percentage contribution cap (suggested at 10-15%) to prevent large projects from distorting the index. Transparency is vital, requiring clear methodologies for fleet composition, evolution, and the separate treatment of offshore wind in Victoria. Additionally, the fleet Marginal Loss Factor (MLF) should be included in index calculations to reflect loss-adjusted output and maintain contract fungibility.

Shaping: dynamic time of day block spread swap

For the shaping product, sellers require charge and discharge periods to be known sufficiently in advance. CEIG identifies risks regarding consecutive discharge blocks that may be physically impossible for Battery Energy Storage Systems (BESS) to follow based on duration. They suggest adding constraints to ensure cumulative thresholds are not exceeded. There are also concerns that using forecast residual demand could create dependencies on inaccurate day-ahead renewable forecasts, potentially leading to perverse market outcomes similar to those observed in Western Australia’s Wholesale Energy Market. To mitigate risks for sellers during high-price events, CEIG recommends applying a $600/MWh cap to the spot price in the shaping contract.

Operational risks could be minimised by aligning the Daily Shaping Period (DSP) with the NEM trading day (04:05 to 04:00) and using pre-dispatch data for determinations. This approach would simplify the process by avoiding the need to combine different forecast datasets and would provide sellers with 12 hours to manage their positions following a 16:00 day-ahead determination.

Firming: $600 price cap

A $600 cap is preferred for firming products to support new assets by allowing more merchant upside. This alignment with the RRPPA spot price exposure cap is critical for the contracts to function effectively as a set. A higher strike price allows sellers to retain merchant revenue and reduces payout frequency, which can lead to lower premiums. Conversely, a lower cap would necessitate higher premiums to compensate for more frequent payouts.

Common contract features

While weekly settlement is workable, CEIG suggests considering quarterly settlement periods to smooth short-term variations and reduce the cash balances projects must hold, thereby improving bankability. Managing Force Majeure (FM) risk is critical; without adequate FM management, bulk energy contracts will not be bankable for project-financed assets. CEIG proposes that FM risks, particularly those affecting specific plants or network segments while the rest of the fleet continues generating (such as transmission tower collapses or hail damage), should be managed at the ESEM Administrator level. This protection should be built into the ESEM framework rather than relying on separate government schemes.

Overarching feedback

CEIG supports the preferred bulk energy product but emphasizes that FM issues and negative pricing mechanisms must be resolved to address bankability. A functioning Market Making Obligation (MMO) will require secondary market liquidity, which depends on resolving these core issues. Finally, the total volume of ESEM contracts must be monitored to ensure they complement rather than crowd out the existing Over-The-Counter (OTC) offtake market, ensuring that project pricing remains achievable and financial closes are not jeopardised.