Australia has two major wholesale electricity pools – the National Electricity Market (NEM) and the South West Interconnected System (SWIS) in Western Australia. NGF members generate electricity for supply to retailers and end-users in both the NEM and the Wholesale Electricity Market (WEM) of the SWIS in Western Australia.
The NEM is the largest interconnected power system in the world spanning an arc of 5,000 kilometres from Queensland to South Australia and Tasmania. The NEM and WEM are competitive wholesale markets offering some of the lowest electricity prices in the world.
The NEM, which commenced on 13 December 1998, supplies electricity to almost nine million customers in Queensland, New South Wales, Victoria, the Australian Capital Territory, Tasmania and South Australia. The 268 registered generators in the NEM have a combined generation capacity of almost 42,000 MW. In 2010-11, generators produced 204 terawatt hours of electricity worth $9 billion.
The NEM is governed by a complex system of national regulations and agencies. The National Electricity Law and the National Electricity Rules set the legal framework. Three bodies operate, regulate or develop policy for the market: the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Energy Market Operator.
The key feature of the NEM is a competitive wholesale pool which matches energy demand with supply at least cost. Generators bid to supply the market with the lowest cost bids accepted by the market operator. Electricity is an ideal commodity to be traded through a pool arrangement like the NEM because it cannot be stored for future use, so supply must vary dynamically with changing demand. And, because each unit of electricity is indistinguishable from other generator produced units.
The SWIS supplies 840,000 customers in Western Australia. The system commenced in September 2006 and now has more than 5,000 MW of installed generation capacity. The WEM is a stand-alone market arrangement managed by the State’s Independent Market Operator (IMO) and supported by the Market Advisory Committee, an advisory group of industry representatives.
The WEM has a unique market design that comprises of a wholesale electricity trading component and a capcity component. The major mechanisim for trading energy in the SWIS is bilateral contracts. Bilateral contracts are commercial agreemetns formed between generators and retailers for the provision of energy to end-use consumers. Through the provision of a capacity mechanisim the SWIS sets out capacity related processes that require the IMO to determine the capacity requirement of the system instead of leaving it to economic forces to determine when new generators enter the market.
Since 1990, demand for electricity has steadily increased, outstripping population growth. Electricity consumption has increased by an average of 2.8 per cent p.a, less than economic growth (3.2 per cent) but at twice the rate of population growth (1.4 per cent). Official forecasts estimate that this growth will continue at an average rate of 1.7 per cent p.a. to 2030.
To date, the industry has successfully met this demand growth with affordable, reliable power. Essential to this success has been policy stability and efficient, competitive markets.
NGF members support efficient markets which maximize competition. Competitive dispatch in wholesale markets ensures that customers receive the lowest cost electricity available. However, the efficiency of electricity markets is being eroded by government policies which distort incentives, raise costs and create uncertainty. The NGF is a strong advocate of continuing electricity market reform to deliver efficient markets for Australia’s electricity customers.