The National Electricity Market (NEM) facilitates the exchange of electricity between generators and consumers whilst maintaining an instantaneous balance between supply and demand, which is essential due to the unique properties of electricity.
The market is designed to deliver competition and customer choice whilst encouraging innovation and ongoing improvement.
The Australian Energy Market Operator (AEMO) operates the NEM.
In a market sense, the electricity supply chain between the generators and consumers is divided into the
- competitive wholesale generation sector
- monopoly network businesses
- competitive retail sector.
Competitive wholesale generation sector
Generators compete to sell their electricity to retailers through a spot market which matches supply to demand instantaneously:
- the generators make offers
- the market determines the combination of generation to meet demand in the most cost-efficient way
- AEMO then issues dispatch instructions to these generators.
The market determines a spot price every half-hour for each of the five regions of the NEM. AEMO settles the financial transactions for all of the electricity traded on the NEM on the basis of these spot prices.
Generators and retailers often protect themselves from movements in the spot price by entering into hedge contracts.
The operation of the spot market is governed by a set of rules to facilitate:
- the operation of an efficient combination of generators at any given time
- the calculation of efficient energy prices in a transparent manner
- efficient operation of and investment in generators
- efficient use of energy by consumers
- safe and secure operating limits for energy flows across transmission networks to minimise the risk of a major system interruption of supply
- competition, efficiency and innovation to drive the best outcomes for energy consumers.
Monopoly network businesses
Transmission networks consist of towers and the wires that run between them, underground cables, transformers, switching equipment, reactive power devices, and monitoring and telecommunications equipment. These are capital intensive assets where it is cost efficient to have only a single network providing the service in an area.
This gives rise to a natural monopoly industry structure. The transmission businesses are carefully regulated to replicate the incentive properties of a competitive market. The rules governing the economic regulation frameworks for the electricity sector enable the regulator to set the maximum revenues that electricity network businesses can charge for the services they provide.
Reliability refers to the extent to which customers have a continuous supply of electricity. Transmission and distribution networks are required to meet reliability standards that, in most cases, are set by jurisdictional governments. The level of reliability that transmission and distribution networks are required to provide affects the level of investment that network businesses undertake. The cost of these investments feed through to the electricity prices paid by customers in the retail sector.
Competitive retail sector
In the competitive retail sector retailers:
- buy electricity from generators (in the wholesale market), and
- resell the electricity to businesses and households (in the retail market).
Some large consumers (such as smelters or large scale manufacturers) may also purchase electricity directly from the wholesale market, rather than through a retailer.
The AEMC makes and amend the National Electricity Rules that underpin the NEM. These include rules that:
- govern the operation of the NEM – the competitive wholesale electricity market and the associated national electricity system
- govern the economic regulation of the services provided by monopoly transmission and distribution networks
- facilitate the provision of services to retail customers (along with the National Energy Retail Rules (NERR)).
We conduct independent reviews and provide advice to governments on the development of electricity markets.
In both of these functions, we are required by law to have regard to the National Electricity Objectives and to ensure the best outcomes for energy consumers.