Australian Electricity Supply (ex NT and WA)

Average Electricity Demand (MW)

Average Electricity Demand (MW)

Sectors of the electricity supply industry are involved with the generation, transmission, distribution and retail sale of electricity. Australia’s social, industrial and commercial success depends on the reliability of the electricity supply. In this way, the industry contributes significantly to the national economy.

Units explained

One watt (w): A unit of power is referred to as a watt.

One megawatt (MW): is equal to one million watts (W).

One gigawatt (GW): is equivalent to one thousand megawatts.

One megawatt hour (MWh): is the energy required to power ten thousand 100 W light globes for one hour.

A 100 MW generator: will power one million 100 W light globes simultaneously.

A 600 MW generator: has sufficient capacity to service 200,000 domestic customers

Watts (wattage): of an electrical appliance indicates the rate at which the appliance converts electrical energy to another form of energy such as heat or light. One watt is equivalent to one joule of work per second. Both the electrical pressure (voltage) and the number of electrons flowing (current) determine the electrical power or rate of energy conversion. A 60-watt light globe uses 60 watts of electricity to produce light, and a typical electric kettle uses 2400 watts to produce heat.

How electricity is transported

A transformer converts the electricity produced at a generation plant from low to high voltage to enable its efficient transport on the transmission system. When the electricity arrives at the location where it is required, a substation transformer changes the high voltage electricity to low voltage for distribution. Distribution lines then carry low voltage electricity to consumers who access it through the power outlets in homes, offices and factories.

Transport of Electricity

Transport of Electricity
Source: AEMO. July 2010. An Introduction to Australia’s National Electricity Market

National Electricity Market (NEM)

1993 – Electricity market reform commenced when the Victorian government embarked on a microeconomic reform of the electricity industry which disaggregate and corporatise the State Electricity Commission of Victoria (SECV, its state owned electricity utility). Once this was completed the corporatised components (power stations etc) were sold to private entities.

1998 – NEM begins operating as wholesale mareket for supply of electricity to retailers and end users in QLD, NSW, ACT, VIC, SA

June 2005 – National Electricity Code was replaced by the National Electricity Law and Rules. The Law and Rules were recently amended to replace NEMMCO with AEMO as the national electricity market and system operator.

  • Australian Energy Market Commission (AEMC) is responsibile for rule making and market development
  • Australian Energy Regulator (AER) is responsible for the enforcement of and monitoring compliance with the Rules and economic regulation of electricity transmission

2008 – TAS join the NEM

1 July 2009 – The Australian Energy Market Operator (AEMO) was established to manage the NEM and gas markets. A key aim of AEMO is to provide an effective infrastructure for the efficient operation of the wholesale electricity market, to develop the market and improve its efficiency and to coordinate planning of the interconnected power system. AEMO’s primary responsibility is to balance the demand and supply of electricity by dispatching the generation necessary to meet demand. AEMO’s core functions are:

  • Electricity Market – Power System and Market Operator
  • Gas Markets Operator
  • National Transmission Planner
  • Transmission Services
  • Energy Market Development

NEM infrastructure

  • Some assest NEM’s infrastructure and operated by State Government
  • Some owned and operated under private business arrangements

Exchange between electricity producers and electricity consumers is facilitated through a pool where the output from all generators is aggregated and scheduled to meet demand. The electricity pool is not a physical location; rather it is a set of procedures that AEMO manages according to the provisions of National Electricity Law and Statutory Rules (the Rules) and in conjunction with market participants and regulatory agencies.

Electricity is an ideal commodity to be traded using pool arrangements because of two of its unique characteristics. Electricity cannot be stored for future use, so supply must vary dynamically with changing demand. And because one unit of electricity is indistinguishable from all other units, it is impossible to determine which generator produced which electricity.

Sophisticated information technology systems underpin the operation of the NEM. The systems balance supply with demand, maintain reserve requirements, select which components of the power system operate at any one time, determine the spot price, and thereby facilitate the financial settlement of the physical market.

The Spot Market

Wholesale trading in electricity is conducted as a spot market where supply and demand are instantaneously matched in real-time through a centrally-coordinated dispatch process. Generators offer to supply the market with specific amounts of electricity at particular prices. Offers are submitted every five minutes of every day. From all offers submitted, AEMO determines the generators required to produce electricity based on the principle of meeting prevailing demand in the most cost-efficient way. AEMO then dispatches these generators into production.

A dispatch price is determined every five minutes, and six dispatch prices are averaged every half-hour to determine the spot price for each trading interval for each of the regions of the NEM. Spot price is used for the settlement of financial transactions for all energy traded in the NEM.

The Rules set a maximum spot price, also known as a Market Price Cap, of $12,500 per megawatt hour (MWh). This is the maximum price at which generators can bid into the market and is the price automatically triggered when AEMO directs network service providers to interrupt customer supply in order to keep supply and demand in the system in balance (ie load shedding).

Market Floor Price

The Rules place a limit on the minimum spot price. This limit is called the Market Floor Price and is currently set at -$1,000 per MWh.

The Reliability Panel reviews the level of the Market Floor Price and Market Price Cap every two years.

Two aspects of the transmission network contribute to varying costs of electricity supply within different areas of the NEM. As electricity flows through the transmission and distribution networks, energy is lost due to electrical resistance, and the heating of conductors.

The losses are equivalent to approximately 10 per cent of the total electricity transported between power stations and market customers.

  • Firstly, losses are incurred as power is transported from where it is produced to where it is consumed through electrical resistance and the heating up of conductors.
  • Secondly, electricity being transported along certain elements of the network may encounter technical constraints on capacity or bottlenecks.

The NEM is a wholesale market. Up to 50 percent of the price paid by domestic and business consumers for electricity supply is accounted for by the direct cost of the energy. Additional charges are added to retail accounts for network usage, service fees, market charges, retail charges and GST.

Inter-regional Trade

The NEM comprises five interconnected electrical regions. There is a designated region reference node in each region where the regional spot price of electricity is set. The QLD, NSW, VIC, TAS and SA regions all contain bothmajor generation and demand centres.

Interconnectors of the NEM

Interconnectors of the NEM
Source: AEMO. July 2010. An Introduction to Australia’s National Electricity Market


Interconnectors are high-voltage transmission lines that transport electricity between adjacent NEM regions. Interconnectors are used to import electricity into a region when demand is higher than can be met by local generators, or when the price of electricity in an adjoining region is low enough to displace the local supply.

Financial Contracts for Electricity

Participants in the NEM require a means of managing the financial risks associated with the significant degree of spot price volatility that occurs during trading periods. They typically achieve this by using financial contracts that lock in a firm price for electricity that will be produced or consumed at a given time in the future. These contracts serve to substantially reduce the financial exposure of market participants and contribute to spot market stability.

They are known as derivatives, and include swaps or hedges, options and futures contracts.

Hedge contracts – Hedge contracts are typically agreements between generators and customers that operate independently of both the market and AEMO’s administration.

Hedge Contracts in the NEM

Hedge Contracts in the NEM
Source: AEMO. July 2010. An Introduction to Australia’s National Electricity Market

Trends affecting electric utilities

  1. Global downturn and reduction in energy/electricity demand as well as costs for electricity generation. For the first time since 1945, the end of the Second World War, the International Energy Agency has forecasted that world electricity demand will fall 3.5% as a result of the global recession.
    • Large industrials cut back on energy consumption due to lower demand leading to falling industrial output
    • Households reduce energy consumption
    • Shrinking credit markets make it difficult for electric utilities to find funding for investment and to achieve renewable energy targets
    • Drop in commodity prices
      • Coal price: Coking call dropped from $285 per metric ton in April 2008 to $85 per metric tonne in 2009
      • Gas price dropped from over $14 in early July 2008 to below $4.50 in late January 2009
  2. Regulations to curb emissions of greenhouse gases to pressure utilities using coal to switch to cleaner forms of energy generation
    • Complex legislation introduced
    • Introduction of carbon trading schemes
    • Appointed new Regulators and change in governance framework
  3. Weather
    • Correlation between weather conditions  and peak power. High temperatures mean high electricity bills
    • Since retail prices are typically regulated, the high costs of generating electricity during peak usage periods cannot be passed on to customers.
  4. Energy demand
    • Increased energy efficiency
    • Increase use of electrical appliances
  5. Aging grid
    • New grid to support infrastructure that is able to handle more power
    • Smart grid to help customers monitor electricity use and managing loads and costs
    • Moderisation is required to accomodate for renewable energy into the energy mix


AEMO, 2010. Introduction to the Australian National Electricity Market website:

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