Electricity markets are facing innovation disruptions at levels never seen before. One of the major drivers is the introduction of distributed energy resources (DERs) technologies, especially those that apply to rooftop solar power. This has called into question established regulatory practices and brought new challenges to system operations. In this context, this article seeks to provide a comprehensive investigation of potential policy options for Australia's energy markets from two perspectives. We first examine recent and proposed reforms in this area, and then proceed to review the challenges for Australian regulators that will have major implications for the future, affecting policymaking, regulation, and market design. Points for practitioners: The Australian energy framework is complicated, reflecting its regulatory history, geographical complexity, and federal governance structure. As a force for creative distraction, the penetration of DERs has created challenges for the electricity system and requires careful regulatory treatment. Topical themes in the regulation of DERs include, amongst others, technical standards, metering access, reserve capacity, new business models, network stability, the role of regulated utilities, and support for low-income households. The necessary regulatory transition is accepted as being evolutionary rather than revolutionary in nature so as to enable the existing major stakeholders to adapt to the new environment.