National Electricity Market

The National Electricity Market (NEM) is the Australian wholesale electricity market and the associated synchronous electricity transmission grid.

The NEM began operation on 13 December 1998 and operations are currently based in five interconnected regions – Queensland, New South Wales, Tasmania, Victoria and South Australia. Tasmania was the last state to join the NEM as the sixth region in May 2005 and became fully operational on 29 April 2006 when the Basslink interconnector was fully activated.

The Snowy region was abolished on 1 July 2008 and the components split between New South Wales and Victoria. The Australian Capital Territory is included in the NSW region of the NEM.

The NEM operates the world’s longest interconnected power systems between Port Douglas, Queensland and Port Lincoln, South Australia with an end-to-end distance of more than 5000 kilometres, and 40,000 circuit kilometres. Over A$11 billion of electricity is traded annually in the NEM to meet the demand of almost 19 million end-use consumers.

Operation of the physical market

Exchange between electricity producers and electricity consumers is facilitated through a spot market where the output from all generators is aggregated and instantaneously scheduled to meet demand through a centrally-coordinated dispatch process. This process is operated by the Australian Energy Market Operator (AEMO) in accordance with the provisions of Australian National Electricity Law and Australian National Electricity Rules.

Scheduled generators submit offers every five minutes of every day. From all offers submitted, AEMO’s systems determine the generators required to produce electricity based on the principle of meeting prevailing demand in the most cost-efficient way (see also Economic dispatch). AEMO then dispatches these generators into production by sending automatic generation control (AGC) target signals to each generating unit.

A dispatch price is determined every five minutes, and six dispatch prices are averaged every half-hour to determine the spot price for each trading interval for each of the regions of the NEM. AEMO uses the spot price as the basis for the settlement of financial transactions for all energy traded in the NEM.

The Rules set a maximum spot price (market price cap) of A$13,100/MWh for the 2013-2014 financial year. The maximum price was increased from A$12,900/MWh (2012-2013). This is the maximum price at which generators can bid into the market. The maximum spot price – which was previously called the value of lost load (VoLL) – is the price automatically triggered when AEMO directs network service providers to interrupt customer supply in order to keep supply and demand in the system in balance.

System reliability

NEM reliability standards are established by the Australian Energy Market Commission (AEMC) Reliability Panel. These standards currently require that unserved energy per year for each region must not exceed 0.002 percent of the total energy consumed in that region that year.

The NEM is required to operate with defined levels of reserve in order to meet the required standard of supply reliability. Under current standards, AEMO is required to ensure 850 megawatts of reserve is carried across the entire NEM.

The reliability safety net provisions of the National Electricity Rules provide that AEMO must procure sufficient reserve to ensure that the reliability of supply meets the reliability standard. When reserves acquired by AEMO are dispatched they are bid in at VoLL thus setting the spot price at the maximum level.

Financial markets

In addition to physical spot trading through the NEM, there is a separate financial trading market for electricity.

Prices in the spot market are highly volatile and the spot price can spike to several hundred times the average price for short periods. Therefore buyers and sellers wish to lock in energy prices through financial hedging contracts. Under a “contract for differences” the purchaser (typically an electricity retailer) agrees to purchase a specified physical quantity of energy from the spot market at a set price (the “strike price”). If the actual price paid in the spot market by the purchaser is higher than the strike price, the counterparty to the contract (typically an electricity generator or a financial institution) pays the purchaser the difference in cost. Conversely, if the price paid is lower than the strike price, the purchaser pays the counterparty the difference.

There are numerous variations on the standard hedging contract available in the market, often containing complicated financial arrangements, for example one way option contracts, cap and collar contracts.

Hedging contracts are financial instruments. The financial market in electricity is conducted through over-the-counter trading and through exchange trading through the Sydney Futures Exchange (see Exchange-traded derivative contract).

The Sydney Futures Exchange lists eight standardised futures products based on Base Load and Peak-Period energy bought and sold over a calendar quarter in the NEM in New South Wales, Victoria, South Australia and Queensland.

Regulation

Institutions

Three key bodies are the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Energy Market Operator.

Australian Energy Market Commission

The Australian Energy Market Commission (AEMC) is currently responsible for determining rules and policy advice covering the NEM. The AEMC was established by the Australian Energy Market Commission Establishment Act 2004 (South Australia). Many of its statutory powers are derived from the National Electricity Law (NEL).

Australian Energy Regulator

The Australian Energy Regulator (AER) regulates the wholesale electricity market. It is responsible for rule enforcement for the NEM as well as economic regulation of the electricity transmission and distribution networks in the NEM. It is also responsible for the economic regulation of gas transmission and distribution networks and enforcing the national gas law and national gas rules in all jurisdictions except Western Australia.

Australian Energy Market Operator

The Australian Energy Market Operator (AEMO) consists of six founding entities: National Electricity Market Management Company (NEMMCO), Victorian Energy Networks Corporation (VENCorp), Electricity Supply industry Planning Council (ESIPC), Retail Energy Market Company (REMCO), Gas Market Company (GMC), Gas Retail Market Operator (GRMO). AEMO draws together the functions carried out by these organisations, incorporating management of the NEM and the retail and wholesale gas markets of eastern and southern Australia and oversees system security of the NEM electricity grid and the Victorian gas transmission network. In addition, it is responsible for national transmission planning and the establishment of a short term trading market for gas.

AEMO was established by the Council of Australian Governments (COAG) and developed under the guidance of the Ministerial Council on Energy (MCE). It is run by a skills-based board of nine non-Executive Directors and the Chief Executive Officer.

National Electricity Law

Due to the process of cooperative federalism under which the NEM was established the National Electricity Law (NEL) is contained in a Schedule to the National Electricity (South Australia) Act 1996 (SA). The NEL is applied as law in each participating jurisdiction of the NEM by application statutes, for example the National Electricity (Victoria) Act 2005.

National Electricity Rules

The National Electricity Rules govern the operation of the National Electricity Market. The Rules have the force of law, and are made under the National Electricity Law. Up-to-date editions of the Australian National Electricity Rules can generally be found on the AEMC's website.

Terminology

Formal terminology

Much of the terminology used in the National Electricity Market is derived from the National Electricity Law (NEL) and National Electricity Rules (NER).

Scheduled Generator

A Generator in respect of which any generating unit is classified as a scheduled generating unit in accordance with Chapter 2 of the NER.

Semi-Scheduled Generator

A generating unit which has a nameplate rating of 30 MW or greater (or is part of a group of generating units connected at a common connection point with a combined nameplate rating of 30 MW or greater), must be classified as a semi-scheduled generating unit where the output of the generating unit is intermittent unless AEMO approves its classification as a scheduled generating unit or a non-scheduled generating unit.

Market Participant

A person who is registered by AEMO as a Market Generator, Market Customer or Market Network Service Provider under Chapter 2 of the NER.

Good faith bidding

Scheduled Generators and Market Participants must make dispatch offers, dispatch bids and rebids in good faith (s.3.8.22A, NER).

Informal terminology

Gentailer

The term 'gentailer' or gen-tailer is a portmanteau word combining the terms generator and retailer, i.e. gen-tailer. This is a reference to the vertical integration of companies operating in the NEM, where generators own a retail arm. The three main companies in Australian NEM commonly described as gentailers are EnergyAustralia, AGL Energy, and Origin Energy.

Outcomes

It has been argued that the reforms have delivered considerable economic benefits. A government review (December 2006) stated that the reforms have underpinned significant levels of investment in energy supply (approximately $7 billion in electricity generation and $4.4 billion in electricity transmission), improved productivity (particularly capital utilisation) and delivered internationally competitive electricity prices for Australian industry and households. In terms of the climate change impacts of the reforms, experts have concluded that the outcome is increased emissions with respect to business as usual scenarios. This is due to the lower cost of coal fired generation compared to other generators, reduced emphasis on energy efficiency from lower prices, the failure to price greenhouse emissions, combined with market design and regulation that favours incumbents.

See also

• Competition law
• Competition and Consumer Act 2010
• Economy of Australia
• Energy policy of Australia
• Electrical grid
• Power purchase agreement