The National Electricity Market (NEM) is a wholesale market that helps deliver electricity to almost 10 million homes and businesses in Australia. It’s one of the largest geographically interconnected power systems in the world. Learn about the NEM with our useful infographic, and get a better understanding of how electricity demand is forecast.
Understanding the NEM and your electricity bills
The biggest component of your electricity bills is the amount of electricity you use, but there are other factors that can influence the amount you pay. These include the time of day you use electricity, the source of the electricity, and the costs to transport it to you. So it’s helpful to know a bit more about how the NEM works.
The NEM explained
The NEM is a wholesale electricity market responsible fordispatching electricity generation to meet demand. But the term is often used more broadly to refer to the wholesale market and the financial market that sits alongside it, plus the electricity networks.
The NEM was established in December 1998. It covers New South Wales, Queensland, South Australia, Victoria, Tasmania and the Australian Capital Territory, spanning a distance of about 4,500 kilometres.
The electricity supply systems in Western Australia, the Northern Territory and Mount Isa are unique to those areas and separate from the NEM.
Map of the National Electricity Market courtesy of the Australian Energy Regulator
How it works
Why have the NEM?
Electricity cannot be easily stored so it’s crucial that sufficient electricity generation is always available to meet demand. Whenever you switch on a light or turn on the TV, you expect there to be enough power available for it to work. So demand for electricity must be met instantaneously. The NEM aims to ensure electricity is available when needed and at an efficiently low cost.
The government-established Australian Energy Market Operator (AEMO) is responsible for managing the electricity dispatch process so the system always has sufficient electricity generation to match demand.
How does the dispatch process work?
Electricity generators are required to submit bids to AEMO daily, detailing how much electricity they are willing to supply the following day and at what cost. AEMO then undertakes a sophisticated analysis to match the generation bids with demand for each five-minute period.
The dispatch process works out the lowest-cost generation mix considering many factors, including weather, typical daily demand patterns, how quickly each generator can supply to the market, and any limitations in the transmission system.
Each five-minute dispatch period has a different volume of electricity generated and a different price. The market settles (that is, sets a wholesale market price) on a half-hourly trading interval. This means that the wholesale market trading price, which is also known as the spot price, is the average of the six five-minute dispatch prices that make up the half-hourly trading interval. In the end, the wholesale market is settled with generators receiving the spot price for the electricity they supply and retailers paying the spot price for the electricity they buy for their customers.
Want to learn more about the dispatch process?
In the dispatch process, the cheapest generator is dispatched first. The last generator needed to meet demand is the one that sets the price for all the other generators in that five-minute period. This type of market facilitates investment and enables generators and retailers to enter into financial contracts outside of the physical NEM which have the effect of fixing the price for electricity. These are usually known as ‘hedge contracts’ because they hedge or manage risk.
Prices vary in response to movements in demand and supply. For example, prices are high:
- when demand from homes and businesses is high, such as on really hot days when people want to run their air-conditioners
- when supply is not sufficient; for example, if a main generator or a transmission line is not operating.
On the hottest and coldest days of the year, the wholesale spot price can reach as high as around $13,000 a megawatt hour as opposed to a typical wholesale price of around $40 a megawatt hour.
These high prices are needed to provide an incentive for peaking generators, which have high operating costs, to offer their supply to the market. Some peaking generators only operate a few days each year when temperatures and prices are high enough for them to recoup their costs.
Wholesale market prices and you
Although energy consumption patterns can make the wholesale market price volatile, most business and residential consumers are insulated from this volatility because the contract tariffs that energy retailers offer are generally stable. This means, as a customer, you and your retailer will agree on the set price for electricity no matter the season, day or hour, and you will not see the fluctuating wholesale market price on your electricity bill.
If the option is available, some customers might decide to enter into a retail contract based on time-of-use pricing. This is when the cost of electricity supplied differs according to the time of day.
New technologies, such as smart meters, now allow for more cost-reflective retail tariffs by letting consumers adjust their demand in response to price variations. Many policymakers see this as increasing the market’s efficiency.
Real time price and demand graphs are available from AEMO.
How is electricity demand forecast?
AEMO is responsible for forecasting electricity demand, but power station generators also need to know how much electricity they should produce and sell into the market and when they should do it. Likewise, retailers need to know how much electricity they should buy on behalf of their customers. Forecasting the required demand is critical.
Many factors affect demand, such as time of day and extreme hot or cold weather. Demand varies throughout the day, throughout geographical regions and also across the seasons. High demand spikes are common between 7 am and 9 am and again between 4 pm and 7 pm.
Peak demand, which is when the power system is stretched to its limits, only occurs on a few days each year and is typically on a weekday when the temperatures are extreme. Power stations, known as ‘peaking generators, supply electricity to meet these extreme peaks. They can be turned on quickly and help to ensure electricity supply is available at all times.