The National Electricity Market (NEM) facilitates the exchange of electricity between generators and retailers. All electricity supplied to the market is sold at the ‘spot’ price.
The NEM operates as a 'spot' market where
- generators are paid for the electricity they produce
- retailers pay for the electricity their customers consume
- power supply and demand is matched instantaneously.
The Australian Energy Market Operator (AEMO) coordinates this process.
The physical and financial markets for electricity are interlinked. Complex information technology systems underpin the operation of the NEM. Supply and demand must be balanced in real time, with systems required to select which generators are dispatched, determine the spot price, and in doing so, facilitate the financial settlement of the physical market.
Regions and interconnectors
The NEM is a 5 region spot market which has:
- Interconnectors (transmission links) which join the regions
- Regional reference nodes (RRNs) at the largest load centre of each region.
Prices are calculated at each regional reference node. Demand in the spot market can be met within one of the regions or across regions.
Electricity moves across regions through interconnectors which connect adjacent regions. Interconnectors deliver energy from lower price regions to higher price regions and can thereby equalise prices between regions.
When interconnectors are operating at full capacity, electricity is transported from a lower price region and sold in a higher price region. However prices are not equalised across regions.
Interconnectors can be a partial substitute for local generation in a region to the extent they can be used to import electricity instead of increasing the capital stock of generation within a region.
Coordinating the dispatch of power across the NEM
Generators submit the price and quantity of electricity that they are willing to generate to AEMO.
AEMO’s central dispatch engine orders the generators’ offers from least to most expensive and determines which generators will be dispatched. In this way, the expected demand for electricity is supplied by the lowest cost mix of generators.
In delivering electricity, AEMO dispatches electricity every five minutes, so generators are required to bid to supply electricity in five minute blocks. For the purposes of settlement, the price is then averaged out over 30 minutes.
The spot price for a 30 minute trading interval is the average of the six dispatch interval prices. All generators dispatched in that trading interval receive the spot price for the period that they were dispatched.
The AEMC has recently completed assessment of a proposal to change the time interval for settlement in the wholesale electricity market from 30 minutes to five minutes. This change is to be introduced with effect from 1 July 2021.
Retailers and generators use electricity contracts as a form of insurance against fluctuating spot prices allowing them to lock in long term revenues or costs at a fixed rate.