Understanding how energy markets operate will enable you to understand how energy is priced and traded, and how costs are passed on to you through your retail bills.
In this section
National Electricity Market
The National Electricity Market (NEM) has five trading regions covering New South Wales and the Australian Capital Territory, Victoria, Queensland, South Australia and Tasmania. The trading regions are interconnected via extra high voltage transmission lines. These interconnectors have sufficient transfer capacity to ensure wholesale prices in each region are similar for much of the time. However, prices can diverge significantly when the interconnecting transmission lines are constrained.
The NEM operates as a gross pool market, where all electricity delivered to the market is traded 24-hours a day, seven days a week. See the wholesale pricing section for more detail on how this gross pool operates.
The Australian Energy Market Operator (AEMO) manages trading in the NEM, according to trading rules governed by the National Electricity Rules. Key elements of the market’s operation include:
- Demand for electricity is matched with supply from generators in five minute periods in the order of the generators’ bid prices. The bid price of the last increment of supply determines the dispatch price for that five-minute period.
- Six dispatch prices are averaged every half hour which determines the spot price at each half-hourly trading interval for each region.
- The National Electricity Rules stipulate a maximum spot price of $12,500 per MWh which is the market price cap and a minimum spot price of minus $1,000 per MWh 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.
- Ancillary service markets are used by AEMO to manage the power system safely, securely and reliably. These services maintain key technical characteristics of the system, including standards for frequency, voltage, network loading and system restart processes and allow supply and demand to be continuously balanced within five-minute dispatch intervals.
The primary market participants are generators and retailers, although several large end users are also registered as participants.
Market participants must meet all the administrative and operational control requirements set by AEMO. There is also a requirement to post funds to meet prudential requirements set by AEMO to mitigate defaults.
Wholesale Electricity Market in Western Australia
The South West Interconnected System (SWIS) is the electricity system covering the south-west of Western Australia, including Perth. The Wholesale Electricity Market of Western Australia (WEM) supplies electricity to the SWIS.
The WEM includes the following mechanisms:
- the RCM, which ensures that sufficient generation and DSM capacity is available to meet the overall SWIS forecast demand;
- the mandatory day-ahead Short Term Energy Market, which allows market participants to trade around their bilateral energy positions;
- the mandatory Balancing Market, a gross pool market that determines dispatch of generation; and
- the contestable market for provision of Load Following Ancillary Services.
The WEM employs a bilateral net settlement system with respect to both energy and capacity, with the IMO facilitating settlement of energy and capacity that are not covered by bilateral contracts.
The electricity commodity market of the WEM is not unlike its NEM counterpart. The market price is determined by offers to supply and bids to purchase (demand). However in the WEM, only the electricity volume that is not already covered by bilateral contracts is traded.
For example, a Market Customer, typically an electricity retailer, may need to purchase additional electricity over and above their contracted position due to fluctuations in the weather or unanticipated increases in demand. In this scenario, the retailer bids into the market for the volume of electricity required to balance its contract position. They pay the market price for that balancing amount of electricity.
The capacity market of the WEM is designed to ensure there is adequate capacity of electricity generation to meet forecast demand and to achieve the reliability targets specified in the Western Australian Market Rules.
The Independent Market Operator of Western Australia (IMOWA) oversees the operation of the WEM. The IMOWA also determines the amount of reserve capacity for the next 10 years in accordance with provisions specified in the Western Australian Market Rules.
After determining the amount of reserve capacity required, the IMOWA places obligations on Market Customers to purchase capacity credits equivalent to their forecast contribution to peak demand. Market Generators, or end users offering demand-side response capacity, earn capacity credits by providing capacity to the system. Market Customers may purchase this capacity from Market Generators through bilateral contracts. If insufficient capacity credits have been purchased, the IMO purchases the residual requirement through a capacity auction.
Gas in south-eastern Australia is traded through either the Short-Term Trading Market or the Victorian Wholesale Gas Market, both operated by AEMO.
Short-Term Trading Market
The Short-Term Trading Market (STTM) consists of three trading hubs in Sydney, Adelaide and Brisbane. One of the objectives for the STTM is to improve transparency and competition in wholesale gas sales.
The trading hubs work as a balancing mechanism so that the gas injected into, and withdrawn from, pipeline systems remains in balance. The STTM runs once a day for gas delivered the next day (i.e. ‘day ahead’) and settles at a clearing price at each hub.
Market participants in the STTM are classified as:
- Shippers, a class of Trading Participant, typically energy retailers, who hold contracts with producers and pipeline operators to supply and transport gas to end users.
- STTM Users, a class of Trading Participant who are also energy retailers, but can also be large gas users who hold contracts with producers and pipeline operators to supply and transport gas for their own use.
- Others participants include gas pipeline operators, who provide transport services to Shippers and STTM Users.
Victorian Wholesale Gas Market
Victoria does not participate in the STTM. Instead Victoria has established its own wholesale gas market which enables market participants to trade the difference between contracted and actual gas consumption volume.
End users can participate in the Victorian Wholesale Gas Market to trade volumes outside of bilateral contracts. Trading volumes represent approximately 10–20% of the total wholesale market volumes. The wholesale price of the remaining volume of gas is set through confidential bilateral contracts between gas producers and (predominantly) energy retailers.
The Victorian Wholesale Gas Market establishes the hourly gas spot price by stacking supply offers in order of price and matching the supply offers against bids to obtain a clearing price. Prices can vary from $0/GJ to $800/GJ. The process happens five times a day at: 6am, 10am, 2pm, 6pm, and 10pm to determine spot prices for the remaining hours of the day.
- Australian Energy Regulator (2010) State of the Energy Market 2010 p76, AER ↩