National Electricity Market
Encyclopedia
The National Electricity Market (NEM) is the name of the Australia
n 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 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 4000 kilometres. Over A$11 billion of electricity
is traded annually in the NEM to meet the demand of almost eight million end-use consumers.
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.
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
of $12,500 per megawatt hour. The maximum price was increased from $10,000 per megawatt hour on 1 July 2010. 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.
(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.
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 difference
s” 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 contact 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.
(AEMC) is currently responsible for determining rules and policy advice covering the NEM. Up-to-date editions of the Australian National Electricity Rules can generally be found on the AEMC's website.
(AER) is responsible for rule enforcement for the NEM as well as economic regulation of transmission networks.
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
n wholesale electricity market
Electricity market
In economic terms, electricity is a commodity capable of being bought, sold and traded. An electricity market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use...
and the associated synchronous
Wide area synchronous grid
A wide area synchronous grid, also called an "interconnection" in North America, is a power grid at a regional scale or greater that operates at a synchronized frequency and is electrically tied together during normal system conditions...
electricity transmission grid.
The NEM began operation on 13 December 1998, and operations are currently based in five interconnected regions - Queensland
Queensland
Queensland is a state of Australia, occupying the north-eastern section of the mainland continent. It is bordered by the Northern Territory, South Australia and New South Wales to the west, south-west and south respectively. To the east, Queensland is bordered by the Coral Sea and Pacific Ocean...
, New South Wales
New South Wales
New South Wales is a state of :Australia, located in the east of the country. It is bordered by Queensland, Victoria and South Australia to the north, south and west respectively. To the east, the state is bordered by the Tasman Sea, which forms part of the Pacific Ocean. New South Wales...
, Tasmania
Tasmania
Tasmania is an Australian island and state. It is south of the continent, separated by Bass Strait. The state includes the island of Tasmania—the 26th largest island in the world—and the surrounding islands. The state has a population of 507,626 , of whom almost half reside in the greater Hobart...
, Victoria
Victoria (Australia)
Victoria is the second most populous state in Australia. Geographically the smallest mainland state, Victoria is bordered by New South Wales, South Australia, and Tasmania on Boundary Islet to the north, west and south respectively....
and South Australia
South Australia
South Australia is a state of Australia in the southern central part of the country. It covers some of the most arid parts of the continent; with a total land area of , it is the fourth largest of Australia's six states and two territories.South Australia shares borders with all of the mainland...
. Tasmania
Tasmania
Tasmania is an Australian island and state. It is south of the continent, separated by Bass Strait. The state includes the island of Tasmania—the 26th largest island in the world—and the surrounding islands. The state has a population of 507,626 , of whom almost half reside in the greater Hobart...
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
Basslink
Basslink is a high-voltage direct current cable link crossing Bass Strait, connecting the Loy Yang Power Station, Victoria on the Australian mainland to the George Town substation in northern Tasmania...
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
Australian Capital Territory
The Australian Capital Territory, often abbreviated ACT, is the capital territory of the Commonwealth of Australia and is the smallest self-governing internal territory...
is included in the NSW region of the NEM.
The NEM operates one of the world’s longest interconnected power systems between Port Douglas, Queensland
Port Douglas, Queensland
Port Douglas is a town in Far North Queensland, Australia, approximately north of Cairns. Its permanent population was 948 residents in 2006. The town's population can often double, however, with the influx of tourists during the peak tourism season May–September. The town is named in honour of...
and Port Lincoln, South Australia
Port Lincoln, South Australia
- Transport :Port Lincoln is the port for the isolated narrow gauge Eyre Peninsular Railway.There is also a subsidiary port at Proper Bay which may be restored to use for iron ore traffic. The export of iron ore through Port Lincoln has been approved by the South Australian Government. Port...
with an end-to-end distance of more than 4000 kilometres. Over A$11 billion of electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
is traded annually in the NEM to meet the demand of almost eight million end-use consumers.
Operation of the NEM Physical Market
Exchange between electricity producersElectricity generation
Electricity generation is the process of generating electric energy from other forms of energy.The fundamental principles of electricity generation were discovered during the 1820s and early 1830s by the British scientist Michael Faraday...
and electricity consumers
Electricity retailing
Electricity retailing is the final process in the delivery of electricity from generation to the consumer. The other main processes are transmission and distribution.- Beginnings :...
is facilitated through a spot market
Spot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...
where the output from all generators is aggregated and instantaneously scheduled to meet demand through a centrally-coordinated dispatch process
Economic dispatch
Economic dispatch is the short-term determination of the optimal output of a number of electricity generation facilities, to meet the system load, at the lowest possible cost, while serving power to the public in a robust and reliable manner...
. This process is operated by the Australian Energy Market Operator
Australian Energy Market Operator
The Australian Energy Market Operator delivers an array of gas and electricity market, operational, development and planning functions. It manages the National Electricity Market and the Victorian gas transmission network. AEMO also facilitates electricity and gas full retail contestability,...
(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
Economic dispatch
Economic dispatch is the short-term determination of the optimal output of a number of electricity generation facilities, to meet the system load, at the lowest possible cost, while serving power to the public in a robust and reliable manner...
). AEMO then dispatches these generators into production.
A dispatch price is determined every five minutes, and six dispatch prices are averaged every half-hour to determine the spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
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
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
of $12,500 per megawatt hour. The maximum price was increased from $10,000 per megawatt hour on 1 July 2010. This is the maximum price at which generators can bid into the market. The maximum spot price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
- which was previously called the Value of lost load
Value of lost load
The Value of Lost Load is the estimated amount that customers receiving electricity with firm contracts would be willing to pay to avoid a disruption in their electricity service. The value of these losses can be expressed as a customer damage function...
(VoLL) - is the price automatically triggered when AEMO directs network service providers to interrupt customer supply in order to keep supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
in the system in balance.
System Reliability
NEM Reliability standards are established by the Australian Energy Market CommissionAustralian Energy Market Commission
The Australian Energy Market Commission was set up by the Council of Australian Governments through the Ministerial Council on Energy in 2005. The AEMC has two roles in relation to national energy markets - as rule maker and as a provider of advice to Ministers on how best to develop energy...
(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 difference
Contract for difference
In finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
s” 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
Counterparty
A counterparty is a legal and financial term. It means a party to a contract. A counterparty is usually the entity with whom one negotiates on a given agreement, and the term can refer to either party or both, depending on context....
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 contact 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
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
trading and through exchange trading through the Sydney Futures Exchange (see Exchange-traded derivative contract
Exchange-traded derivative contract
Exchange-traded derivative contracts are standardized derivative contracts that are transacted on an organized futures exchange....
).
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
The Australian Energy Market CommissionAustralian Energy Market Commission
The Australian Energy Market Commission was set up by the Council of Australian Governments through the Ministerial Council on Energy in 2005. The AEMC has two roles in relation to national energy markets - as rule maker and as a provider of advice to Ministers on how best to develop energy...
(AEMC) is currently responsible for determining rules and policy advice covering the NEM. Up-to-date editions of the Australian National Electricity Rules can generally be found on the AEMC's website.
Enforcement
The Australian Energy RegulatorAustralian Energy Regulator
The Australian Energy Regulator is the regulator of the wholesale electricity and gas markets in Australia. It is part of the Australian Competition and Consumer Commission and enforces the rules established by the Australian Energy Market Commission....
(AER) is responsible for rule enforcement for the NEM as well as economic regulation of transmission networks.
Outcomes
The reforms are widely considered as having 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
- Economy of AustraliaEconomy of AustraliaThe economy of Australia is a developed, modern market economy with a GDP of approximately US$1.23 trillion. In 2011, it was the 13th largest national economy by nominal GDP and the 17th largest measured by PPP adjusted GDP, representing about 1.7% of the World economy. Australia was also ranked...
- Energy policy of AustraliaEnergy policy of AustraliaEnergy policy of Australia describes the energy policy in the politics of Australia. Energy in Australia describes energy and electricity production, consumption and export/import in Australia...
- Australian Energy Market CommissionAustralian Energy Market CommissionThe Australian Energy Market Commission was set up by the Council of Australian Governments through the Ministerial Council on Energy in 2005. The AEMC has two roles in relation to national energy markets - as rule maker and as a provider of advice to Ministers on how best to develop energy...
- Electrical grid