Electricity Supply and the NEM
This is the first article in our informative series on the energy market. We’ll start with some foundations – a basic explanation of the Australian National Electricity Market (NEM) and how it functions. Later articles in the series will build on this topic and discuss the electricity supply curve, negative spot prices, inertia, frequency, and how energy storage can support the NEM.
What is the NEM[i]?
NEM is short for National Electricity Market. Despite its name, the NEM is not Australia-wide; it includes five states, Queensland, New South Wales, Australian Capital Territory, South Australia, Victoria, and Tasmania. The NEM is both the physical electricity transmission infrastructure (i.e. the network of poles, wires, and other infrastructure) that connect those states, and the energy marketplace, which is operated by the Australian Energy Market Operator (AMEO). The total distance of the NEM is around 5000 km and includes the transmission network that carries power from generators to large industrial users and local energy electricity retailers (companies you buy electricity from for your home).
What is the AEMO?
AEMO stands for the Australian Energy Market Operator (AEMO) and is the organisation that manages the electricity market, ensuring that supply is matched with demand simultaneously. It’s an extremely important role; without an exact match of electricity, the physics of a power system mean that blackouts and system failures could happen. AEMO manages both the NEM and the Wholesale Electricity Market (WEM) which is the electricity market in Western Australia. AEMO itself does not buy or sell electricity, it manages and facilitates the wholesale market of around 30 retailers and over 100 generation companies.
What does the market look like?
The NEM is the marketplace is where generators sell electricity and retailers buy it. Retailers then resell electricity to businesses and households. AEMO manages this market in five-minute settlements (5MS), meaning that every 5 minutes AEMO matches a dollar amount that a generator is willing to sell electricity for, to a dollar amount that a retailer is willing to pay for that electricity. The amount which is matched is the market clearing or spot price. AEMO also ensures there’s an adequate reserve on standby in case a generator fails to provide its forecast amount, which ensures system security. States within the NEM have their own price region and don’t bid against each other.
What are spot prices[ii]?
There are two ways to buy and sell electricity in the NEM wholesale market: through the spot market and the contract market. All electricity in the spot market is bought and sold at the spot price.
The spot price is determined by AEMO and it is price where the amount willing to sell and buy is matched in the marketplace. It’s also a mechanism to tell generators how much electricity is needed in the market at any time. As a general principle, if the spot price is low, supply usually outweighs demand, and if the spot price is high, demand usually outweighs supply.
You can find the live spot price here.
Does the spot price have a fixed cap?
The Australian Energy Market Commission (AEMC) sets the market cap and a market minimum, which is adjusted every year in line with the consumer price index as according to the National Electricity Rules (NER). The market price cap for 1 July 2022 to 30 June 2023 is $15,500 / MWh[iii].
The AEMC is essentially the rule maker for Australian electricity and gas markets. They make and amend Australia’s National Electricity Rules, National Gas Rules, and National Energy Retail Rules, as well as provide market development advice to governments[iv].
A spot price cap is in place to ensure any extreme spot prices can be moderated. In future articles, we’ll be exploring what situations can cause extreme prices.
Energy Generation Mix
The NEM began operations in the electricity spot market in late 1998. Since then, the total electricity generation capacity has grown and during the financial year 2021-22 the NEM generation capacity was 53,538 MW[v]. In the last year, between 28.4% and 45.5% of the energy generation in the NEM was from renewable generators. Find the real-time energy mix on AEMO, and compare historical consumption and generation with this tool.
How is Electricity Transported?
To help visualize the NEM and how electricity travels, we’ve put together a step-by-step, beginning with generation. Bear in mind, this is a simplified visualisation of a very complex system.
Generators: Electricity is generated through a range of sources. Historically, a large proportion of power has come from base-load fossil fuel generators. More recently the generation mix has been diversified and renewable power generation has been increasing. Regardless of how the energy is generated; points of generation are often located some distance away from the point of use (industrial or domestic).
Prepared for transport: The electricity is put through a transformer to increase its voltage for efficient long-distance transport.
Long-distance transport: The high-voltage power is then sent through transmission lines. These are the very big, tower-like lines you see between power stations and cities.
Point of Distribution: The transmission lines take high-voltage electricity to a point of distribution. Here, the power is converted to a low voltage through a distribution transformer for local use.
Short-distance transport: Transporting the low-voltage electricity from the distribution transformer to the consumer is achieved through distribution lines. These are the power lines you see on suburban streets.
Arrival for use; Consumers can be domestic and commercial level (i.e. homes and offices) or industrial (i.e. factories). However, some industrial consumers receive their electricity at high voltage due to power-intensive processes.
Advancements in renewable energy in the last few decades have complicated this generator-to-consumer path. Domestic-level rooftop solar photovoltaic cells and batteries can also provide electricity to the grid, creating a bilateral flow of electricity. We will discuss the complexity of adding these points of generation and storage in another upcoming article – it’s different from the traditional system outlined above.
AEMO has fantastic educational resources; visit their website here. And view the AEMO Fact Sheet on the NEM.
Published 16 January 2022 - Arden Jarrett
A version of this article was originally published on 2 December 2020.
References:
[i] https://aemo.com.au/-/media/files/electricity/nem/national-electricity-market-fact-sheet.pdf
[ii] https://www.aemc.gov.au/energy-system/electricity/electricity-market/spot-and-contract-markets
[iii] https://www.aemc.gov.au/news-centre/media-releases/2022-23-market-price-cap-now-available
[iv] https://www.aemc.gov.au/
[v] https://www.aer.gov.au/wholesale-markets/wholesale-statistics/annual-generation-capacity-and-peak-demand-nem
