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Electricity Market |
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Australia’s Energy Market
The development of a competitive
National Electricity Market (NEM) is seen as a principal component in Australia's
ongoing micro-economic reform agenda.
The NEM allows trade in electricity across the inter-connected eastern States
and Territories including Victoria, New South Wales, South Australia, Queensland, the
Australian Capital Territory, and Tasmania. Western Australia and the
Northern Territory are not involved because of the long transmission distances involved.
Energy companies trade across State and Territory borders through a single wholesale
power market, commonly described as the "pool". Electricity generators are
paid for the electricity they sell into the pool. Electricity retailers buy from the pool to
on-sell to end-user customers via the distribution network. The power is bought and sold
through a system which resembles a continuous auction in which generators must balance
their ability to supply electricity against the prices being offered at any given time.
Since 1995 retail competition has been introduced progressively throughout all regions
in the NEM, beginning with the larger customer segments and moving down to smaller
customers. Timetables for full retail competition have varied across State regions, with all
customers in New South Wales, Victoria, South Australia, and the Australian Capital Territory
now able to choose their electricity retailer.
How the Market Operates
The wholesale electricity market has two basic elements,
"the pool" and "hedging contracts".
The Pool
Generators nominate their selling price and available generation, known
as "bidding into the pool", for each half hour in the day. The power supplied by
generators is dispatched to meet demand from buyers in the order of their offers (ie. the lowest
price is dispatched first, the generator offering the second lowest price is dispatched second, and
so on). This means the generator providing power at the lowest price is able to sell all of its desired
amount of energy and generate to meet that dispatch amount.
However the price all generators are paid is that nominated by the highest priced generator
which is actually dispatched in a given period. This is known as the marginal price and becomes
the pool price (or regional reference price) for that period. As none of the generators knows the price,
which its competitors are offering, all power stations are keen to operate as efficiently as possible
and to offer prices as competitively as possible.
If any generator sets its price too high, it runs the risk of not selling all of its desired power
generation or even possibly not selling any power at all.
Hedging Contracts
As pool prices fluctuate on a half hourly basis, nobody knows
what electricity will cost until each half hour period is completed. Power consumers in planning
their business and budgets generally prefer to be able to predict the price they will have to pay and
to do this they use hedging contracts. Generators are also keen to establish known selling prices.
Hedging Contracts are financial agreements between wholesale electricity buyers and sellers in which
they agree to a fixed range of prices for a nominated amount of electricity for a nominated period. This
reduces the risk of big price fluctuations for both parties. These contracts allow generators to be assured
of adequate revenue. Buyers also benefit by being able to gain price certainty from generators by
locking into contracts and therefore knowing what their future costs will be. Use of these hedging
contracts means that the electricity purchase or sale price is known with some certainty for the period
of the contract.
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