The NEM — or National Electricity Market — is a single electricity market covering the five interconnected eastern regions of Australia: Queensland, New South Wales (and the ACT), Victoria, South Australia, and Tasmania. The NEM's interconnected transmission grid is one of the largest in the world. It is operated by AEMO (the Australian Electricity Market Operator).
The NEM is essentially five interconnected regional markets
The five regions in the NEM each operate as their own price zone - and will clear at different prices. These prices reflect the different demand and generation profiles as well as the limited interconnection capacity between each region.
Generation in each region can look very different. The capacity mix in each reflects the region’s geography, history, and the energy policies of each state government.
For example, Queensland and New South Wales are heavily reliant on generation from plants burning black coal. In Victoria, however, this is brown coal. Meanwhile, South Australia and Tasmania have no active coal generation capacity. South Australia relies on a greater proportion of gas generation and Tasmania hydro.
A centrally dispatched, energy-only market with a single spot price - determined every 5 minutes
There is no market for forward energy in the NEM (although there are bilaterally traded futures contracts)—AEMO operates the entire market via a single 5-minutely spot market. There is also no Capacity Market, which means the energy (and ancillary services) market is expected to deliver the required revenues for generation to be built.
This combination of features results in significant price volatility. Prices are capped at $17,500/MWh, with a floor of—$1,000/MWh—and these are hit regularly.
Dispatch and pricing in the NEM are determined by a central algorithm. Generators provide availability and prices to AEMO, while demand provides energy requirements and prices. AEMO then clears the market, accounting for interconnector capacity between regions. This results in a single clearing price per region that all dispatched generation receives.
This dispatch algorithm runs every five minutes, providing a series of five-minute dispatch instructions to market participants. It accounts for sub-regional transmission constraints, dispatching only generation from which power can actually flow to reach demand.
Frequency response services maintain grid frequency at 50 Hz
The five-minute dispatch algorithm aims to keep generation and demand in balance across each interval. At sub-five-minute levels, any imbalances are resolved through frequency response services.
These are known as FCAS (Frequency Control Ancillary Services), and correct for imbalances between generation and demand to maintain grid frequency at 50 Hz, paid for via availability rather than energy. Frequency is also managed via the mandatory (and unpaid) Primary Frequency Response—a requirement for all generators trading in the NEM.
FCAS comes in two forms: contingency, which triggers in response to large frequency deviations, and regulation, dispatched by AEMO continuously at 4-second intervals to correct smaller deviations.
The procurement of these ancillary services is co-optimised within the same 5-minute market as energy. This means the lowest cost combination of energy and FCAS requirements is procured across the whole of the NEM.
For more on frequency response in the NEM, read our beginner’s guide here.
Battery energy storage in the NEM
The NEM is home to the world’s first ‘big’ battery: the now 150 MW Hornsdale Power Reserve. Since then, battery capacity has continued to grow and looks set to hit 2 GW by the end of 2024.
This has been achieved through a combination of direct government support, innovative contracting arrangements, and an understanding of how the market operates by those building batteries.
In our first deep dive into the NEM, we examine all this and more. Our 2024 State of BESS in the NEM article is free to read here.
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