The National Electricity Market (NEM) is the backbone of Australia's electricity system, facilitating the generation, transportation, and trade of electricity across the eastern and southern regions of the country.

The NEM is a complex, competitive, and highly regulated system designed to ensure a reliable, cost-efficient supply of electricity.

Covering five interconnected regions—Queensland, New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Tasmania—the NEM powers homes, businesses, and industries through one of the world’s longest interconnected power systems.

Stretching over 40,000 kilometres of transmission lines, the NEM supplies electricity to around 23 million people across these regions. Energy is generated, traded, and consumed within each region, with interconnectors enabling electricity to flow between them. Notably, Western Australia and the Northern Territory operate their own separate electricity systems and are not connected to the NEM due to the distance between their networks and the eastern states.

Since its inception as a wholesale electricity market in 1998, the NEM has played a vital role in balancing supply and demand across the grid, ensuring reliable and cost-effective electricity for the population. With more than 570 registered participants—including electricity generators, transmission and distribution network providers, and retailers—the NEM facilitates the supply of around 175 terawatt hours of electricity annually.

How does the National Electricity Market operate?

At the heart of the NEM is a wholesale electricity market, where electricity is traded and dispatched in real time. This market operates as a ‘spot market’ or ‘pool,’ matching electricity supply and demand at five-minute intervals.

The Australian Energy Market Operator (AEMO) manages this centralised process, coordinating the dispatch of electricity to meet consumer demand.

Power stations across the NEM regions submit offers to the market, specifying how much electricity they are willing to generate and at what price for each five-minute interval. These generators include coal, gas, hydro, wind, and solar plants, among others. Energy storage systems, such as pumped hydro and battery storage, also participate in this bidding process.

Electricity generated by rooftop solar systems isn’t traded through the NEM, but does lower the demand that these generators need to meet.

AEMO monitors electricity demand in real-time and dispatches generators starting with the lowest-priced offers. As demand increases, more expensive generators are progressively dispatched until enough electricity is produced to meet the grid’s requirements. This process repeats every five minutes, ensuring that supply matches demand as closely as possible.

The highest offer accepted by AEMO during each five-minute period becomes the ‘dispatch price’ for that interval. Every generator whose electricity is dispatched during that period is paid the same dispatch price, regardless of the price they initially offered. A separate price is determined for each of the five NEM regions.

The wholesale price of electricity in the NEM can vary significantly, depending on supply and demand dynamics, but it is subject to a price cap and floor. As of 2023–24, the price is capped at $16,600 per megawatt hour (MWh), with a floor of –$1,000 per MWh. The cap changes in line with the consumer price index (CPI) each year, but the floor remains unchanged.

Once generated, electricity is transported through high-voltage transmission lines to large industrial users and local distribution networks, which then deliver electricity to homes and businesses on lower-voltage power lines.

Managing risk and volatility

AEMO constantly monitors the balance between supply and demand. It uses forecasting tools to predict electricity needs and keeps reserve capacity on hand to cover any unexpected shortfalls, such as the sudden loss of a generator. When supply falls short of demand or is at risk, AEMO can issue Lack of Reserve (LOR) notices to prompt more supply or reduce demand.

The NEM’s interconnected nature also helps manage electricity supply between regions. Interconnectors allow electricity to flow from low-price regions to higher-price regions, smoothing out supply imbalances. However, when these interconnectors reach their capacity, price differences between regions can widen, and more expensive local generation may need to be dispatched.

The spot market is highly competitive, and can experience significant price fluctuations due to changes. To manage the risk of these volatile prices, energy retailers and large industrial consumers often hedge their exposure by purchasing electricity through the contract market. In this market, generators and retailers can enter into contracts to lock in fixed prices for future electricity supplies, providing stability for both parties and insulating them from sudden price spikes in the spot market.

Ultimately, by coordinating the generation and dispatch of electricity in real-time through a wholesale spot market, the NEM plays a critical role in balancing supply and demand, maintaining grid stability, and ensuring Australians have access to the power they need.

As the energy landscape evolves towards more renewable sources, the NEM will continue to adapt, providing a secure and flexible platform for Australia’s future electricity needs.