National electricity market 101

The National Electricity Market (NEM) is a wholesale commodity exchange for electricity spanning Australia’s eastern and south-eastern coasts. It comprises five interconnected states that also act as price regions: New South Wales (including the Australian Capital Territory), Queensland, South Australia, Tasmania and Victoria.

All electricity in the NEM is traded through a spot market, where supply and demand are matched in real time through a centrally coordinated dispatch process. Every 30 minutes, generators offer to supply the market with specific amounts of electricity at particular prices. From all offers submitted, the dispatch process decides which generators will produce electricity, based on the principle of meeting demand in the most cost-effective way.

The spot market price is determined by the bid from the generator supplying the last unit of energy required to balance supply and demand during a given supply period. All generators that supply electricity in this period receive that price.

The role of retailers

Retailers manage risk on behalf of their customers. They swap volatile wholesale electricity prices for fixed retail prices. However, the price actually paid by retailers to generators is determined by their hedging position. If a retailer does not own generation assets, hedging is managed through futures contracts.

Other costs – notably network charges, and to some extent environmental charges – are simply passed through to customers.

To learn more about the NEM, check out this factsheet from the Australian Energy Market Operator (AEMO).

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