NEM operations began on 13 December 1998 and currently covers Queensland, New South Wales, Australian Capital Territory, Victoria, Tasmania and South Australia.[1]Western Australia and the Northern Territory are not connected to the NEM.[1] The NEM comprises five regions, with the ACT being in the NSW region. Tasmania joined the NEM in May 2005 and became fully operational on 29 April 2006 when the Basslink interconnector was fully activated.[2] The Snowy region was abolished as a region on 1 July 2008 and the components split between New South Wales and Victoria.[3] The Northern Territory has adopted parts of the National Electricity Law, with the Australian Energy Market Commission becoming the rule maker for the Territory for parts of the National Electricity Rules from 1 July 2016.[4] Western Australia is also considering adopting parts of the NER.[4]
The NEM operates one of 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 5,000 kilometres, and 40,000 kilometres of high voltage transmissions line.[5] During the 2017-18 financial year, 203 TWh of electricity with a market value of AU$17 billion was traded through the NEM, serving 9.7 million end-use consumers.[5] Approximately 40% of NEM generation is consumed in New South Wales, while Victoria and Queensland consume approximately 25% each.
FY19/20 rooftop solar capacity was 10,696MW, NEM capacity 49,832MW, NEM demand 35,626MW [6]
Scheduled generators submit offers every five minutes of every day.[citation needed] 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).[citation needed] AEMO then dispatches these generators into production by sending automatic generation control (AGC) target signals to each generating unit.[citation needed]
A dispatch price is determined every five minutes (termed Dispatch Intervals, abbreviated as DI)[7] to determine the spot price for each 5-minute trading interval abbreviated as TI.[8] Before October 2021, six dispatch prices were averaged every half-hour. There are 5 trading regions for each of the regions of the NEM.[citation needed] AEMO uses the spot price as the basis for the settlement of financial transactions for all energy traded in the NEM.[citation needed]
There is a maximum price that generators can bid in at. Under the Rules, the AEMC adjusts this maximum spot price MPC (market price cap) by movements in the consumer price index by 28 February each year for the rate to commence on 1 July. For the 2020-2021 financial year the MPC was $15,000/MWh. There is a further limit on the price called the Cumulative Price Threshold, which is the sum of value of all the TI's for the previous 7 days, calculated on a rolling basis. When this exceeds $224,600, AEMO caps the bids to a nominated value, currently $300/MWh. Whilst the price is capped in this manner, it is known as an Administered Price period. The process continues until the rolling average drops to allow normal trading without impinging the threshold too rapidly again.
Market Price Cap (MPC) – 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.[citation needed] From 1 July 2022 to 30 June 2023 the MPC has been set to $15,500/MWh. From 1 October 2021 to 30 June 2022 was $15,100/MWh. The MPC for the 2020-2021 financial year was $15,000/MWh; $14,700/MWh in 2019-2020; and $14,500/MWh in 2018-2019. For the 2017-2018 financial year the MPC was $14,200/MWh and the Cumulative Price Threshold was $212,800.[9] The maximum price was $14,000/MWh in 2016-2017, $13,800/MWh in 2015-2016, $13,500/MWh in 2014-2015, and $13,100/MWh in 2013-2014.[citation needed]
The Rules also set a minimum spot price of minus $1,000 per MWh[10] which is the market floor price. This negative market floor price allows generators to pay to stay online when the cost of staying online is lower than the cost of shutting down and re-starting their plants. For a renewable generator, staying online may also cost less than what generators receive from support mechanisms like the Renewable Energy Target scheme, plus their own costs.[11]
The transmission network service providers (TNSPs) are operators of the high voltage electricity transmission networks. There are five state-based TNSPs servicing each of the regions in the NEM, with crossborder interconnectors linking the state grids at state borders to allow electricity to flow from one state to another. Four of the networks form a wide area synchronous grid except for Tasmania which is linked via HVDC. The TNSPs link generators to the 13 major distribution networks that supply electricity to end-use customers.
TNSPs participate in the Australian Energy Regulator's (AER) revenue proposal process, where submissions of the TNSPs, the AER and other interested parties are used to set the maximum allowable revenue (MAR) for the TNSPs for a five-year period.
NEM reliability standards are established by the Australian Energy Market Commission (AEMC) Reliability Panel.[13] 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.[13]
The NEM is required to operate with defined levels of reserve in order to meet the required standard of supply reliability.[13] Under current standards, AEMO is required to ensure 850 megawatts of reserve is carried across the entire NEM.[13]
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.[13] When reserves acquired by AEMO are dispatched they are bid in at the MPC thus setting the spot price at the maximum level.[13]
Financial markets
In addition to physical spot trading through the NEM, there is a separate financial trading market for electricity.[citation needed]
Prices in the spot market are highly volatile and the spot price can spike to several hundred times the average price for short periods.[14] Therefore, buyers and sellers wish to lock in energy prices through financial hedging contracts.[citation needed] 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”).[citation needed] 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.[citation needed] Conversely, if the price paid is lower than the strike price, the purchaser pays the counterparty the difference.[citation needed]
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.[citation needed]
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.[15]
Regulation
Institutions
Three key bodies are the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Energy Market Operator.[16]
Australian Energy Market Commission
The Australian Energy Market Commission (AEMC) is currently responsible for determining rules and policy advice covering the NEM.[citation needed] The AEMC was established by the Australian Energy Market Commission Establishment Act 2004 (South Australia).[citation needed] Many of its statutory powers are derived from the National Electricity Law (NEL)[17]
Australian Energy Regulator
The Australian Energy Regulator (AER) regulates the national electricity market.[citation needed] It is responsible for rule enforcement for the NEM as well as economic regulation of the electricity transmission and distribution networks in the NEM.[citation needed] 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.[citation needed]
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).[citation needed]
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 it oversees system security of the NEM electricity grid and the Victorian gas transmission network.[citation needed] In addition, it is responsible for national transmission planning and the establishment of a short term trading market for gas.[citation needed]
AEMO was established by the Council of Australian Governments (COAG) and developed under the guidance of the Ministerial Council on Energy (MCE).[citation needed] It is run by a skills-based board of nine non-executive directors and the chief executive officer.[citation needed]
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).[18] The NEL is applied as law in each participating jurisdiction of the NEM by application statutes, for example the National Electricity (Victoria) Act 2005.[19]
National Electricity Rules
The National Electricity Rules (NER) govern the operation of the National Electricity Market. The Rules have the force of law, and are made under the National Electricity Law.[20] Up-to-date versions of the Australian National Electricity Rules can generally be found on the AEMC's website.[21]
Terminology
Formal terminology
Much of the terminology used in the National Electricity Market is derived from the National Electricity Law (NEL)[22] and National Electricity Rules (NER).
Scheduled Generator
A generating unit generally non-intermittent units above 30MW. They are required to submit price/quantity bids specifying their generation intentions, and must comply with dispatch instructions from AEMO.[23]
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.[citation needed]
Good faith bidding
Scheduled Generators and Market Participants must make dispatch offers, dispatch bids and rebids in good faith (s.3.8.22A, NER).[citation needed]
Informal terminology
Gentailer
The term 'gentailer' or gen-tailer is a portmanteau word combining the terms generator and retailer, i.e. gen-tailer.[citation needed] This is a reference to the vertical integration of companies operating in the NEM, where generators own a retail arm.[citation needed] Four companies in the Australian NEM commonly described as gentailers are EnergyAustralia, AGL Energy, Origin Energy and Snowy Hydro (Lumo and Red Energy being retailer brands). Additionally, ERM Power is a generator as well as small business retailer.
Gentrader
Outcomes
It has been argued that the reforms have delivered considerable economic benefits.[citation needed] 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.[24] 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.[citation needed] 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 gas emissions, combined with market design and regulation that favours incumbents.[25]
2017 pricing crisis
On 16 October 2017, the ACCC published a preliminary report into the electricity market[26] highlighting significant concerns about the operation of the National Electricity Market, which is leading to serious problems with affordability for consumers and businesses. ACCC Chairman Rod Sims said:
“It’s no great secret that Australia has an electricity affordability problem. What’s clear from our report is that price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure. Consumers have been faced with increasing pressures to their household budgets as electricity prices have skyrocketed in recent years. Residential prices have increased by 63 per cent on top of inflation since 2007-08.”
The ACCC estimates that in 2016-17, Queenslanders will be paying the most for their electricity, followed by South Australians and people living in New South Wales. Victorians will have the lowest electricity bills. On average across the NEM, a 2015-16 residential bill was $1,524 (excluding GST), made up of network costs (48%), wholesale costs (22%), environmental costs (7%), retail and other costs (16%) and retail margins (8%). The ACCC attributed the main reason for electricity price increases to higher network costs for all states other than South Australia, where generation costs represented the highest increase. "The wholesale (generation) market is highly concentrated and this is likely to be contributing to higher wholesale electricity prices." The ACCC accused the network operators of "over-investing" in poles and wires and gaming rules around revenue.[27] The ‘big three’ vertically integrated gentailers, AGL, Origin, and EnergyAustralia, continue to hold large retail market shares in most regions, and control in excess of 60% of generation capacity in NSW, South Australia, and Victoria making it difficult for smaller retailers to compete. Retail margins increased significantly in NSW, but decreased in others.[26]
In the September 2017 quarter, the price of electricity increased nationally by 8.9%.[28]
The New Zealand electricity market (NZEM) is a decentralised electricity market regulated by the Electricity Industry Participation Code administered by the Electricity Authority (EA). The authority was established in November 2010 to replace the Electricity Commission.
In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had undergone enormous changes for reasons ranging from the technological advances on supply and demand sides to politics and ideology. A restructuring of electric power industry at the turn of the 21st century involved replacing the vertically integrated and tightly regulated "traditional" electricity market with multiple competitive markets for electricity generation, transmission, distribution, and retailing. The traditional and competitive market approaches loosely correspond to two visions of industry: the deregulation was transforming electricity from a public service into a tradable good. As of 2020s, the traditional markets are still common in some regions, including large parts of the United States and Canada.
In the electricity sector in the United Kingdom, the National Grid is the high-voltage electric power transmission network serving Great Britain, connecting power stations and major substations and ensuring that electricity generated anywhere on it can be used to satisfy demand elsewhere. The network covers the great majority of Great Britain and several of the surrounding islands. It does not cover Northern Ireland, which is part of a single electricity market with the Republic of Ireland.
A transmission system operator (TSO) is an entity entrusted with transporting energy in the form of natural gas or electrical power on a national or regional level, using fixed infrastructure. The term is defined by the European Commission. The certification procedure for transmission system operators is listed in Article 10 of the Electricity and Gas Directives of 2009.
The East–West Interconnector is a 500MW high-voltage direct current submarine and subsoil power cable which connects the Irish and British electricity markets. The project was developed by the Irish national grid operator EirGrid.
The energy policy of Australia is subject to the regulatory and fiscal influence of all three levels of government in Australia, although only the State and Federal levels determine policy for primary industries such as coal. Federal policies for energy in Australia continue to support the coal mining and natural gas industries through subsidies for fossil fuel use and production. Australia is the 10th most coal-dependent country in the world. Coal and natural gas, along with oil-based products, are currently the primary sources of Australian energy usage and the coal industry produces over 30% of Australia's total greenhouse gas emissions. In 2018 Australia was the 8th highest emitter of greenhouse gases per capita in the world.
The merit order is a way of ranking available sources of energy, especially electrical generation, based on ascending order of price and sometimes pollution, together with amount of energy that will be generated. In a centralized management, the ranking is so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line. Dispatching generation in this way, known as economic dispatch, minimizes the cost of production of electricity. Sometimes generating units must be started out of merit order, due to transmission congestion, system reliability or other reasons.
Transgrid is the manager and operator of the high voltage electricity transmission network in New South Wales and the Australian Capital Territory, Australia, and is part of the National Electricity Market (NEM). The company's offices are located in Sydney, Newcastle, Orange, Tamworth, Wagga, and Yass.
The Australian Energy Market Operator (AEMO) performs an array of gas and electricity market, operational, development and planning functions. It manages the National Electricity Market (NEM), the Wholesale Electricity Market (WA) (WEM) and the Victorian gas transmission network. AEMO also facilitates electricity and gas full retail contestability, overseeing these retail markets in eastern and southern Australia. It is additionally responsible for national transmission planning for electricity and the establishment of a Short Term Trading Market (STTM) for gas.
The North Sea Link is a 1,400MW high-voltage direct current submarine power cable between Norway and the United Kingdom.
The South West Interconnected System (SWIS) is an electricity grid in the southwestern part of Western Australia. It extends to the coast in the south and west, to Kalbarri in the north and Kalgoorlie in the east. It is not connected to the other large Australian grids. Other parts of the state are connected to independent, smaller grids, including the larger-scale North West Interconnected System and many smaller microgrids managed by Horizon Power.
South Australia is a leader in utility-scale renewable energy generation, and also produces gas and uranium for electricity generation. Gas production is mostly concentrated in the Cooper Basin in the state's north-east. Gas is delivered from these fields by pipeline to users interstate and to Port Adelaide where it fuels three separate gas-fired power plants. Uranium is also mined in South Australia, though nuclear power generation is prohibited nationally. The Olympic Dam mine is the world's single largest known deposit of uranium and represents 30% of the world's total uranium resource. Many utility-scale wind farms and solar farms have been commissioned during the 21st century and geology with potential for geothermal energy has also been identified but is yet to be developed.
Powerlink Queensland is an electricity transmission system operator owned by the Government of Queensland which operates the high-voltage electricity transmission infrastructure in Queensland.
Tasmanian Networks Pty Limited, trading as TasNetworks, is a Tasmanian Government State owned company that is responsible for electricity transmission and distribution throughout Tasmania. It also owns and operates a telecommunications network throughout the state.
The Australian electricity sector has been historically dominated by coal-fired power stations, but renewables are forming a rapidly growing fraction of supply.
The South Australian blackout of 2016 was a widespread power outage in South Australia that occurred as a result of storm damage to electricity transmission infrastructure on 28 September 2016. The cascading failure of the electricity transmission network resulted in almost the entire state losing its electricity supply, affecting 850,000 SA customers. Kangaroo Island did not lose its supply, as the Kangaroo Island power station had been built to supply the island for the contingency of a failure in the power cable under the Backstairs Passage.
Hornsdale Power Reserve is a 150 MW grid-connected energy storage system owned by Neoen co-located with the Hornsdale Wind Farm in the Mid North region of South Australia, also owned by Neoen.
Marinus Link is a proposed 1500 megawatt capacity high voltage direct current (HVDC) electricity interconnector, to strengthen the connection between the Australian states of Tasmania and Victoria, on Australia's National Electricity Market. It involves approximately 250 km of subsea cables and approximately 90 km of underground land cables. Marinus Link will also incorporate significant optical fibre capacity for system control, with the remaining capacity available to strengthen telecommunications and data connectivity between the regions. Marinus Link will be supported by approximately 220 km of high voltage alternating current (HVAC) of proposed transmission developments in North West Tasmania, known as the North West Transmission Developments (NWTD). Collectively, Marinus Link and the North West Transmission Developments are known as Project Marinus. In October 2022, authorities pledged loans for the project, as well as supporting facilities such as pumped hydro in Tasmania.
The Heywood interconnector is a 275 kV AC overhead electricity transmission line with two circuits connecting the electricity grids in South Australia and Victoria, two states of Australia. Both are part of the National Electricity Market. The nominal capacity of the interconnector is 650 MW since an upgrade in 2016. The interconnector was commissioned in 1988 and was the first connection between the two state electricity grids.
A load pocket is an area of electric grid that has limited ability to import electricity due to either very high concentration of demand or insufficient transmission capabilities and therefore cannot be entirely provided with power without participation of local electricity generation providers. A typical load pocket includes a major city. Load pocket's existence usually indicates difficulties with building of either new generation or new transmission, or both due to the area constraints or political pressure and despite the pocket being an attractive place for investment. The load pockets represent a problem for the deregulated electricity markets, as in the absence of regulation the captive customers are forced to accept the prices set by the local providers.
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