In July 2022, Climateworks Centre had the opportunity to respond to the Energy Security Board (ESB)’s capacity mechanism high-level design paper, in a submission co-signed by the Monash Energy Institute.

The Design Paper outlined a high-level proposal for a capacity mechanism for the National Electricity Market (NEM), part of post-2025 market design reforms being considered.

A capacity mechanism provides financial incentives to entities that offer capacity during certain periods.

It is critical that market interventions are integrated with broader reforms under the ESB’s post-2025 market design process to support Australia’s transition to a net zero economy and utilise the opportunities from the global economic transformation.

Climateworks recommended that the ESB’s post-2025 market design process considers the following key elements:

  • Market design and investment decisions that support Australia’s net zero economy.
  • Integration across the multiple technology and system transformations happening simultaneously.
  • Energy management or flexibility and energy efficiency is prioritised.
  • Flexibility to respond, as greater foresight develops.
  • The role of zero-emissions energy in maintaining Australia’s industrial and export strengths.

If the ESB considers that the NEM cannot wait to have a more integrated approach through post-2025 market reform, we suggest any capacity mechanism is explicitly designed as an interim measure.