Appendix

The Australian National Electricity Market

To supply that energy there are many hundreds of increasingly diverse electricity generators supplying the National Electricity Market (NEM). All states except Western Australia and the Northern Territory are connected to the eastern grid and electricity can flow forwards and backwards across state boundaries according to demand and supply. 

This pool of suppliers, thus created, forms the National Electricity Market (NEM).  This functions as a central dispatch system and is managed by the Australian Energy Market Operator (AEMO).

The NEM is a wholesale market through which generators and retailers trade electricity. There are six participating jurisdictions (five states and the ACT) linked by transmission network inter-connectors.

In the larger States, the energy available from the NEM is derived, predominantly, by burning coal and gas. The exceptions are South Australia and Tasmania that rely more on wind and hydro-electricity respectively.

The electricity price in this market place is governed by demand and supply within wide limits.

The Australian Energy Regulator monitors the market to ensure that participants comply with the National Electricity Law and the National Electricity Rules.  These rules set a maximum spot price of $15,000 per MWh (From 1 July 2020).  The also set a  market floor price; presently negative $1,000 per MWh.

The prevailing spot price can be seen on the AEMO website.  

For a full explanation of the Australian NEM go here...

Based on the generator’s offers to supply and the prevailing demand, AEMO’s systems determine the generators required to produce electricity based on the principle of meeting the retailers’ demand in the most cost-efficient way. AEMO then dispatches these generators into production.

The dispatch price between the market and generators is struck every five minutes and averaged to the NEM spot price every half hour for each of five generation regions. This price fluctuates very substantially according to season and time of day with additional variability due to sun, wind, or rain and even what’s on TV.

In meeting a particular demand AEMO calls for offers to supply.  It then 'stacks' these from lowest to highest; the final and highest price being the last to complete the stack.

This is made more complex by a market intervention known as the mandatory Renewable Energy Target (RET), an Australian Government scheme designed to "reduce emissions of greenhouse gases in the electricity sector and encourage the additional generation of electricity from sustainable and renewable sources".  This is achieved by tradable certificates issued by generators employing renewable energy (typically wind and solar). One certificate for each MWh generated and a proportion of these must be acquired by wholesale purchasers of electricity - typically electricity retailers.  The price of a Large-scale Generation Certificate (LGC) varies according to supply and demand. 

In other words, the LGC' are a mechanism for subsidising renewable electricity generators at the expense of non-renewable generation. 

The energy captured by wind and solar power stations is, obviously, free. The electricity cost is entirely due to the capital invested overall; the cost of servicing that capital (interest / opportunity cost); the cost of depreciating the equipment (maintenance; it's removal/remediation after end of life etc); the staff costs related to the venture; and profit.

Because wind and large-scale solar photovoltaic (PV) generators have zero fuel cost, and receive one LGC for each MWh provided, they can have negative effective energy cost and bid at the lowest price.  So, if wind or large-scale PV is available, it goes to the bottom of the stack.

The price of fuel to a thermal station determines the lowest price they can bid without losing money.

Less efficient thermal stations, and those burning more expensive fossil fuels, will be at the top of the AEMO stack.  These are the first to miss out when demand is low. But base-load stations need to keep spinning even when there is no load, so they need to bid low to come into the stack, even at the risk of a price at which they will lose money.

The effect of LGC's is to suppress the market price and make some thermal stations unprofitable, even though they are still essential to meet demand at peak times.

At the same time, the consumer is paying more for electricity, than would otherwise be the case, as a result of the cost to retailers of the LGC’s. Some retailers invite consumers to pay more for a 'green electricity' option.

This may well be a good thing for wind and large-scale PV power; but not everyone in the industry is delighted.  Some suggest that this is removing the market incentive to invest in new base-load capacity. 

But the market distortions introduced by the Renewable Energy Target have been declining for some time.  LGC the price (the effective subsidy to large-scale wind and solar) remained at around $80 a MWh until 2018 the price has since fallen steadily to around $35 in 2020 and is expected to halve again, due to new investment in renewables exceeding the generation levels needed to meet the present target.

While government incentives to move to renewable energy vary, most other wholesale electricity markets around the world, for example in the EU, operate in a similar manner.