However, the current investment model is not delivering it at the scale necessary.
Short duration battery energy storage systems (BESS) have been deployed rapidly and are now broadly bankable. In contrast, long duration storage remains difficult to finance at scale. Without a step change in revenue certainty and market design, capital will not deploy at the pace and scale required.
The result is a growing disconnect between what the system needs and what the market is able to fund. The core issue is that the NEM continues to rely on market-based price signals to deliver infrastructure that exhibits the characteristics of a public good. Long duration storage provides system-wide benefits that are not fully captured in project revenues. As a result, the market is structurally under-incentivising the very assets required to maintain reliability.
Key takeaways
- The NEM is moving beyond short duration storage, with long duration assets now critical to maintaining reliability as coal exits.
- Long duration storage is not being deployed at scale due to a lack of revenue certainty and bankable contracting structures.
- This creates a structural risk, where the system is building what is financeable rather than what is required.
- Closing the gap will require market design changes that deliver long dated revenue support aligned with asset lives.
A market in transition
Two-hour lithium-ion systems have dominated the BESS market, supported by strong FCAS revenues and short-duration arbitrage.
That model is now under pressure. As installed BESS capacity has increased, FCAS revenues have compressed significantly (in some markets falling from several hundred dollars per MWh to single-digit levels). At the same time, higher renewable penetration has increased wholesale price volatility, creating value for assets capable of capturing wider intra-day spreads.
This has driven a shift toward longer-duration configurations, typically in the two-to-four-hour range and increasingly beyond.
The technology landscape is also evolving toward longer duration. Systems targeting eight hours and beyond are becoming increasingly relevant, with pumped hydro energy storage (PHES) sitting at the upper end, capable of providing multi-day storage over asset lives measured in decades.
The emerging need for long duration storage
The exit of coal-fired generation is accelerating. Closures such as Liddell and the expected retirement of Eraring and Yallourn are removing large volumes of dispatchable capacity.
This is not just an energy gap. It is a system services gap.
Coal plants provide inertia, system strength, frequency control and black start capability. While gas peaking, transmission and demand response will play important roles, they do not address the need for sustained firming over multiple hours or days.
Long duration energy storage is uniquely positioned to fill this role. It can bridge extended periods of low renewable output and support system stability in ways that short duration assets cannot.
Without it, the NEM faces a structural reliability challenge.
Constraints on deployment
Despite its system importance, long duration energy storage (LDES) is not being deployed at scale. The primary issue is not technology, but economics. LDES presents material challenges from both a bankability perspective and in achieving required equity internal rate of return thresholds. Two-hour BESS has become a largely bankable asset class. Lenders can size debt against relatively well understood revenue streams, including frequency control ancillary services (FCAS), short duration arbitrage and, increasingly, contracted revenues. This supports conventional project finance structures and higher gearing.
LDES presents a fundamentally different financing profile.
Long duration assets are more exposed to wholesale arbitrage over extended periods. These revenues depend on forward assumptions around generation mix, demand patterns and network constraints, all of which are changing.
Forecasting these variables over long-dated asset lives relative to typical debt tenors introduces uncertainty that is difficult to reconcile with lender requirements.
The offtake market for long duration storage is shallow. There is limited natural demand for eight-hour plus shaped products and limited willingness from counterparties to enter long dated contracts.
Government schemes such as Long-Term Energy Service Agreements (LTESA) and the Capacity Investment Scheme (CIS) have helped, but they have not yet created a consistent, scalable revenue floor for longer duration assets.
By contrast, international markets have addressed similar challenges through availability-based or public-private partnerships-style structures, where long-term contracted or regulated revenues underpin both debt sizing and equity returns. No equivalent framework has emerged at scale in the NEM for long duration storage, leaving these assets exposed to a level of merchant risk that is inconsistent with conventional project finance.
Short duration systems can cycle multiple times per day, maximising revenue per unit of installed capacity. Longer duration assets cycle less frequently, reducing revenue intensity relative to capital cost and increasing sensitivity to forward price assumptions. However, the value proposition for LDES is less about cycling frequency and more about the scarcity premium during extended periods of low renewable output – a fundamentally different revenue profile that current market structures do not adequately reward.
For lithium-ion systems, long duration performance is less established. For alternative technologies, operating history remains limited. This reduces lender confidence in long term availability and performance.
Conventional project finance frameworks favour shorter lived assets. Long lived assets such as pumped hydro are disadvantaged because a large portion of their value sits beyond typical debt tenors and is heavily discounted. In net present value terms, this limits both debt capacity and the ability of equity to realise acceptable returns within typical investment horizons.
Implications for system reliability
The lack of investment in long duration storage creates a structural risk for the NEM.
As coal exits, the system is losing both dispatchable energy and critical system services. Short duration batteries, while important, cannot meet sustained firming requirements during extended periods of low renewable output.
At the same time, demand is expected to increase due to broader electrification trends, including transport, industry and rapid expansion of data centre infrastructure.
This creates a widening gap between required firm capacity and what is being delivered.
Pumped hydro highlights the issue. It provides long duration storage, synchronous system services and asset lives measured in decades, but much of its value is not captured in project revenues. Instead, it accrues to the broader system through lower wholesale prices, reduced curtailment and improved network utilisation.
This misalignment means that assets with the highest system value are the least likely to be delivered under current market settings.
Implications for market design
Policy frameworks have demonstrated that revenue support can unlock investment.
The New South Wales LTESA scheme and the national CIS have supported significant volumes of storage development, including most recently a small number of longer duration BESS. However, current and proposed frameworks are not sufficient to support long duration storage at scale.
The proposed Electricity Services Entry Mechanism includes features such as post-market revenue support and strategic reserves. While directionally positive, there is a risk that contract structures will remain misaligned with asset lives and capital requirements.
Unlocking long duration storage will require:
- Long dated revenue floors aligned with asset lives (rather than a reliance on short-term price signals).
- Availability-style or capacity-style payments that reduce downside risk.
- Deeper and more standardised offtake structures.
- Concessional finance or capital support for high capex, long life assets such as pumped hydro.
Without these changes, capital will continue to favour shorter duration, higher turnover assets, even where they do not meet system needs.
Delivering this shift will also require greater clarity on institutional responsibility. Market design reform sits across the Australian Energy Market Commission, Australian Energy Market Operator and individual state governments, each operating on different timelines and with different policy levers. Without coordinated action, there is a risk that reforms remain piecemeal and insufficient to support investment at the scale required.
Closing the investment gap
The transition underway is not incremental. It is a structural shift in how the system is stabilised and financed.
Long duration storage is not a future requirement. It is a current one. However, capital will not deploy on system need alone. It requires revenue certainty, credible contracting structures and risk profiles that align with both investor and lender requirements.
Until that alignment is achieved, investment will continue to favour shorter duration, faster payback assets, regardless of whether they meet system needs.
Bridging the gap between what is bankable and what is required is now the central investment and market design challenge in the energy transition. It will require a deliberate shift in how the NEM values, procures and finances long duration storage, from a marginal market participant to core system infrastructure.