The National Electricity Market (NEM) Explained

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The majority of electricity customers in Australia have their electricity supplied through the ‘National Electricity Market’ (NEM). But what exactly is the NEM and how does it affect your home’s electricity supply? Understanding the NEM can help you better understand the electricity system in Australia as a whole. In our guide, we explain what the NEM is, how it works, and how it affects your power bill.

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What is the NEM?

The National Electricity Market (NEM) is a wholesale market that facilitates the exchange of electricity between generators and retailers.

How does the NEM work?

In order to explain the concept of the NEM, we’ll first explain the environment that the NEM sits in. Electricity is created by generators, usually powered by coal, gas, wind, solar or water. The generated electricity is then fed into what’s called a ‘grid’ or ‘electricity network’, which in broad terms refers to the poles and wires that deliver the electricity from the generators to your home.

Electricity distributors are responsible for building and maintaining this network and delivering power to homes and businesses. Power retailers buy electricity from generators on your behalf and then on-sell to homes and businesses. In other words, distributors transport electricity while retailers buy the power in bulk and you pay the retailer for the electricity you use. This is demonstrated below:

What does the NEM do?

The wholesale energy market is where the generators sell electricity and retailers buy it to on-sell to households and businesses. It’s a highly competitive market space as there are many generators and retailers involved. Within the wholesale market, an electricity spot price is determined, reflecting supply and demand across the NEM. This ‘spot price’ is the price that the retailers pay for electricity. The price changes every 30 minutes to reflect the market’s position. Spot prices are generally the highest when there’s increased demand for electricity, usually in the evening. Conversely, spot prices are the lowest when there’s little demand for electricity.

Where does the NEM operate?

NEM Mapped

According to the Department of the Environment and Energy, the National Electricity Market is one of the largest interconnected electricity systems in the world, covering around 40,000km of transmission lines and cables, which supplies around nine million Aussie consumers. The NEM operates across:

  • New South Wales
  • Queensland
  • Australian Capital Territory
  • Victoria
  • Tasmania
  • South Australia

Source: AEMC

Western Australia and the Northern Territory are not connected to the NEM. They have their own electricity systems and separate regulatory arrangements.

Who manages the NEM?

There are three independent regulators that work collaboratively to oversee the operation of the NEM. They are:

  • Australian Energy Market Commission (AEMC) – Responsible for creating and implementing the ‘National Electricity Rules’ (NER), which govern the operation of the NEM.
  • Australian Energy Market Operator (AEMO) – Oversees the day-to-day operation of the NEM, facilitating energy trading by sending signals to generators and market participants.
  • Australian Energy Regulator (AER) – Monitors and regulates the energy market to give effect the NER.

These regulators operate at a high level, and consumers have little to no interaction with them. If you have an issue with your power company, the appropriate authority to contact will usually be the energy ombudsman for your state.

How does the NEM affect me?

The NEM underpins the electricity industry in most of Australia, determining the wholesale price of power, and consequently, what you pay on your bill. Everyday customers are becoming increasingly involved in the NEM, with some retailers offering ‘wholesale prices’ on electricity to customers.

Customers with solar power are also participating in the market when they export electricity to the grid in exchange for a feed-in tariff. Those with solar batteries can also sign up to demand response schemes to export to the grid and contribute to the NEM in periods of high electricity demand.

All this highlights a growing trend toward a de-centralised electricity market where customers are more involved with the NEM than they might realise. With that said, individual customers have limited control over the wholesale price of power. If you think you’re paying too much, then your best bet is to shop around and find a better retailer.

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