The NEM and Wholesale Electricity Pricing
Everything you need to know about wholesale electricity pricing
With the introduction of new electricity tariffs due in July of 2020, including the new Wholesale Electricity Pricing, it’s time to understand what it’s all about. The electricity chain can be very confusing as can your bill with all the separate charges, here is a rundown of how the chain operates and who is responsible for each link in the chain.
How are wholesale electricity prices determined
Electricity production is matched to electricity consumption, and spare generating capacity is always kept in reserve in case it’s needed. The current energy price then can be calculated. Electricity production is also subject to transmission limitations so that the network is not overloaded.
Within this market, prices are determined every five minutes and averaged over each half hour; generators bid how much electricity they are prepared to sell to retailers and at what price for each five-minute interval.
Starting from the lowest priced bid, generator bids are accepted by the market operator (AEMO) until the point where there is enough supply to meet demand. The price paid for all electricity in each interval is that of the highest bid accepted
To pay generators, AEMO must recover costs from customers. Most customers don’t participate directly in the NEM, so they purchase their electricity through a retailer. Customers pay the retailers a commercial tariff, and retailers manage customers’ energy purchases, including paying AEMO the spot price.
What are our power bills made up of?
When you pay your retailer for electricity, this is – on average – what you’re paying for:
- 51% Network costs – the cost of building and maintaining poles, wires, meter readers and other items in the distribution network.
- 20% Wholesale costs – the cost your retailer pays for your wholesale electricity.
- 9% Carbon price – the cost passed on by fossil-fuel generators for their carbon emissions.
- 4% Environmental schemes – your retailer’s contribution to compulsory Federal and State Government environmental schemes.
- 16% Retail services – what you pay your retailer for retail services and customer service.
*Averages are from the Commonwealth Treasury. Individual bills may vary.
About the National Electricity Market (NEM)
The NEM is a wholesale electricity market in which generators sell electricity and retailers buy it to on-sell to consumers. There are over 100 generators and retailers participating in the market, so it’s highly competitive and therefore an efficient way of maintaining relatively competitive electricity prices in the wholesale market. The majority of Australian states get their power straight from the NEM.
NEM FACTS
- The National Electricity Market (NEM) incorporates around 40,000 km of transmission lines and cables.
- It supplies about 200 terawatt hours of electricity to businesses and households each year.
- It supplies around 9 million customers.
- It has a total electricity generating capacity of almost 54,421 MW (as at December 2017).
- $16.6 billion was traded in the NEM in the financial year 2016–17.
- Strategic reserves of demand and generation resources of more than 1000 MW for 2017-18.
The NEM commenced operation as wholesale spot market in December 1998. It interconnects five regional market jurisdictions – Queensland, New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Tasmania. Western Australia and the Northern Territory are not connected to the NEM.
The NEM involves wholesale generation that is transported via high voltage transmission lines from generators to large industrial energy users and to local electricity distributors in each region, which deliver it to homes and businesses.
The transport of electricity from generators to consumers is facilitated through a ‘pool’, or spot market, where the output from all generators is aggregated and scheduled at five-minute intervals to meet demand.
