In a market sense, the electricity supply chain between the generators and consumers is made up of the:
- competitive wholesale generation sector
- monopoly network businesses
- competitive retail sector.
Competitive wholesale generation sector
The wholesale national electricity market (NEM) is where generators sell electricity and retailers buys electricity. Retailers then resell electricity to businesses and households.
There are two ways to buy and sell electricity in the NEM wholesale market: through the spot market and the contract market.
Monopoly network businesses
Transmission and distribution networks are the poles and wires, plus transformers, switching equipment, reactive power devices, and monitoring and telecommunications equipment, that make up the electricity grid.
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 and distribution businesses are 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 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
- 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.