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11 August 2016
The Australian energy market is highly sophisticated. It is home to one of the largest geographically interconnected power systems in the world, the National Electricity Market.
What is the NEM?
Established in 1998, it covers 4,500 kilometres, five state-based networks and six cross-border interconnectors, across New South Wales, Queensland, South Australia, Victoria and the Australian Capital Territory. In fact, the NEM is responsible for around 80 per cent of Australia’s electricity consumption. Western Australia, Tasmania and the Northern Territory are excluded from the network.
The total value of electricity traded in the NEM in 2014-2015 was $8.2 billion.
The electricity that is produced is then distributed from electricity suppliers to a broad range of parties, approximately: 26% to commercial and services, 25% to residential users, 24% to manufacturing, 13% to electricity gas and water services, 2% to transport and 1% to agriculture.
Electricity cannot be easily stored, so it’s crucial that sufficient electricity generation is always available to meet demand. For example, whenever you switch on a light or turn on the TV, you expect there to be enough power available for it to work immediately.
The aim of the NEM is to make sure electricity is available when it’s needed, in a cost effective and reliable way.
There are three primary participants in the National Electricity Market.
1. Generators: currently 336 generators are responsible for producing the electricity for sale on the NEM, with the main source coming from renewable power stations and the burning of fossil fuels.
2. Retailers: A number of retailers purchase electricity from the generators, who are the wholesale electricity providers. These retailers then sell the electricity to homes and businesses. These are energy providers like Origin Energy who provide you with your energy needs.
3. A government established Australian Energy Market Operator is tasked with overseeing the process.
The total value of electricity traded in the NEM in 2013-2014 was $10.1 billion.3
How does the NEM work?
Technically the NEM is responsible for dispatching electricity to meet demand, but the term is often used more broadly to include the financial market and the physical grid that sit alongside it.
These three elements work together in the following way:
1. Wholesale market - where generators sell electricity and retailers buy it to on-sell to you the consumer. There are lots of generators and retailers participating, so it’s highly competitive and an efficient way of ensuring electricity prices remain competitive.
2. Financial market - sits alongside the wholesale market and involves retailers and generators entering into hedging contracts to buy and sell electricity. These contracts set an agreed price for the electricity and help to manage the risk of price volatility.
3. The physical grid - the transmission and distribution networks that deliver electricity from power stations to homes and businesses anywhere in the system.