National Electricity Market

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The National Electricity Market (NEM) is the name of the Australian electricity distribution grid and wholesale electricity market. The NEM began operation in December 1998, and operations are currently based in six interconnected regions - Queensland, Victoria, South Australia, New South Wales, the Snowy Mountains region (including the Australian Capital Territory and parts of New South Wales), and Tasmania. Tasmania joined the NEM as a sixth region in May 2005 and became fully operational on 29 April 2006 when the Basslink interconnector was fully activated.

The NEM operates on the world’s longest interconnected power system with an end-to-end distance of more than 4000 kilometres. Up to AU $7 billion of electricity is traded annually in the NEM to meet the demand of almost eight million end-use consumers.

1 Operation of the NEM Physical Market
2 System Reliability
3 Financial Markets
4 Rule Making
5 Enforcement
6 Outcomes
7 External links

[edit] Operation of the NEM Physical Market

Exchange between electricity producers 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 NEMMCO, the market and system operator of the National Electricity Market in Australia. NEMMCO manages the market according to 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, NEMMCO’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). NEMMCO 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. NEMMCO 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 $10,000 per megawatt hour. This is the maximum price at which generators can bid into the market. The maximum spot price is also called Value of lost load (VoLL), and it is the price automatically triggered when NEMMCO directs network service providers to interrupt customer supply in order to keep supply and demand in the system in balanced.

[edit] System Reliability

NEM Reliability standards are established by the Australian Energy Market Commission (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 requrired to operate with defined levels of reserve in order to meet the required standard of supply reliability. Under current standards, NEMMCO 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 NEMMCO must procure sufficient reserve to ensure that the reliability of supply meets the reliability standard. When reserves acquired by NEMMCO are dispatched they are bid in at VoLL thus setting the spot price at the maximum level.

[edit] 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 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”). 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 (finance) 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. ^[1]

[edit] Rule Making

The Australian Energy Market Commission (AEMC) is currently responsible for determining rules and policy advice covering the NEM.

[edit] Enforcement

The Australian Energy Regulator (AER) is responsible for rule enforcement for the NEM as well as economic regulation of transmission networks.

[edit] 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. ^[2]