Australia's National Electricity Market
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Australia’s National Electricity Market Wholesale Market Operation Executive Briefing Disclaimer: All material in this publication is provided for information purposes only. While all reasonable care has been taken in preparing the information, NEMMCO does not accept liability arising from any person’s reliance on the information. All information should be independently verified and updated where necessary. Neither NEMMCO nor any of its agents makes any representation or warranty, express or implied, as to the currency, reliability or completeness of the information. ©NEMMCO 2005 – All material in this publication is subject to copyright under the Copyright Act 1968 (Commonwealth), and permission to use the information must be obtained in advance in writing from NEMMCO. Section 1 Contents Introduction 2 Section 1: Market Operator 2 History of Electricity Supply in Australia 3 Design of the NEM 4 Regional Pricing 4 The Spot Price 4 Value of Lost Load (VoLL) 5 Gross Pool and Net Pool Arrangements 5 Locational and Nodal Pricing 5 Energy-only Market 5 Section 2: Operating the Market 6 Registration of Participants 6 Generators 7 Scheduled and Non-scheduled Generators 8 Market and Non-market Generators 8 Market Network Service Providers 8 Scheduled Loads 8 Monitoring Demand 9 Forecasting Supply Capacity 9 Participation in Central Dispatch 9 Bidding 10 Pre-dispatch 11 Spot Price Determination 12 Scheduling 12 Dispatch 14 Failure to Follow Dispatch Instructions 14 Section 3: Operating the Ancillary Services Markets 15 Ancillary Services 15 Ancillary Services Generators 15 Frequency Control Ancillary Services 16 Other Ancillary Services 17 Section 4: Interaction Between the Market and the Power System 18 Access to Transmission and Distribution Networks 18 Technical Operating Limits and Standards 19 Reliable Operating State 19 Secure Operating State 19 Issues that Impact on Price 20 Energy Losses 20 Constraints 21 Section 5: NEMMCO’s Intervention in the Dispatch Process 22 Issuing Directions 22 Reserve Trading 22 Load Shedding 23 Pricing in Extreme Conditions 23 Section 6: Principal Power Stations, and Interconnectors 24 Index 29 1 Section 1 Introduction Electricity markets are inherently complex. Much of their complexity comes from the fact that electricity trade involves the interaction of principles from both electrical engineering and financial markets. Additionally, because electricity supply underpins national economic activity, the electricity supply industry is regulated by law and its reliable function is a high political and social priority. The National Electricity Market Management Company Limited (NEMMCO) fulfils the dual roles of market operator and system operator for Australia’s National Electricity Market (NEM). This means that NEMMCO is responsible for managing both the wholesale spot market in electricity and the transmission elements of the physical power system that underpins the operation of the NEM. Managing the spot market in electricity involves balancing short-term supply and demand through a centrally-coordinated dispatch process. This process drives the operation of the electricity pool to which all registered generators contribute their output in response to dispatch instructions, and from which all market customers purchase their electricity needs. Market Operator Under National Electricity Law, NEMMCO is responsible for managing and operating the NEM in accordance with the National Electricity Rules. The NEM is the mechanism through which electricity is physically traded between registered generators and market customers. Trade in electricity takes place dynamically, 24-hours-a-day and seven-days-a-week. NEMMCO is required to balance supply with demand by scheduling the most cost-effective generators into production. Many of the processes that constitute NEM trade are automated through sophisticated information technology systems, while the functions of forecasting demand and managing congestions on the network rely to a considerable extent on the input and monitoring of operators. Supply and demand must be balanced in each of the NEM’s regions simultaneously. NEMMCO’s management of the market must take into account both the capacity and availability of generators to produce electricity in each of the six NEM regions, and the capacity and availability of the inter-regional transmission systems to transfer supply across region boundaries. 2 Section 1 History of Electricity Supply in Australia Historically, State and territory governments owned and operated Australia’s electricity supply assets and sold electricity at regulated prices. During the 1990s, governments deregulated the industry and implemented a program of significant reform. The objectives of the reform included introducing competition, delivering cost-efficiencies, sharing resources, and standardising regulatory arrangements. Building on the fact that the country’s population is concentrated in the States on the eastern seaboard, and some of the State transmission systems were already interconnected, governments created a national electricity market that shared resources and widened trade options. This meant building additional interconnectors between state networks and centralising administration and operation of the market and the transmission elements of the power system. Today, the NEM operates in Queensland, New South Wales, Australian Capital Territory, Victoria, South Australia and Tasmania. The six regions of the NEM basically follow state boundaries, with Australian Capital Territory included in the New South Wales region, and the area surrounding the Snowy Mountains Hydro-Electricity Scheme being a region in its own right. When Basslink is commissioned for service in 2006 to enable trade between Tasmania and the Australian mainland, all six regions of the NEM will be electronically interconnected to facilitate inter-regional trade. Figure 1 Interconnectors in the NEM QLD QNI Directlink SA NSW SNO-NSW VIC-SA Murraylink SNOWY VIC SNO-VIC Basslink* TAS *Under construction 3 Section 1 Design of the NEM Electricity has certain economic and physical characteristics that determine the processes by which it is traded. Firstly, because it cannot be economically stored for future use, electricity must be dynamically produced to satisfy prevailing demand. Secondly, as it is not possible to distinguish one unit of electricity from another, determining which generator produced which particular unit of electricity is not feasible. These characteristics mean that electricity is an ideal commodity to be traded using pool arrangements. NEMMCO aggregates electricity produced by generators into an electricity pool, and market customers purchase their electricity needs from the aggregated supply. Market forces determine the level of electricity trade and the cost characteristics of that trade. NEMMCO acts as the NEM’s clearing house, with market customers paying the spot price for the energy they consume, and NEMMCO, in turn, paying generators the spot price for the electricity they supply to the pool. Regional Pricing The NEM uses regionally-based pricing in which the price at each network connection point is determined in relation to a common regional reference node price. Typically, the cost of supply will increase the further the point of consumption is from the regional reference node. When the network operates below the level of its maximum technical transfer capacity, electricity prices in different regions of the NEM are related to each other by simple real-time loss calculation. But when an interconnector is operating at its maximum transfer capacity, and therefore physically prohibits the transfer of additional capacity between regions, the prices in the different regions may vary. The Spot Price Trading in the NEM is based on a 30-minute trading interval. The spot price is the price applied to electricity trades through the pool for a particular trading interval in a specific region of the NEM. The spot price is the price used to settle the market, and is the average of the six dispatch price outcomes of generator bidding for the preceding half hour. That is, the spot price is the half-hourly clearing price to match supply and demand. A regional reference node has been identified at one specific connection point to the power system in each region of the NEM. A regional spot price is calculated for each trading interval at the regional reference point, and all trade in the region is based on the regional spot price. This means that for any one trading interval in the NEM, six separate spot prices for each of the six NEM regions are used to financially settle trade between registered generators and market customers. The spot price that applies to any one transaction depends on the region of the NEM in which the trade was transacted. The spot price for each NEM region is published at the end of each trading interval. The publication of this information provides a straightforward basis upon which registered participants can negotiate bilateral financial contracts against future movements in the spot price, and, in this way, forms the basis of the way they therefore bid their capacity into the market. The process also ensures transparency of NEM operation. 4 A price cap applies to bidding and dispatch prices in the NEM. The maximum amount a generator can bid into the market is equivalent to the price cap, and is currently $10,000 per megawatt hour. The market floor price is the minimum price at which bids can be submitted to the market. Its