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Experiences of the Australian Electricity

Market under power disturbances and

financial stress
Dr Brian Spalding
Chief Operating officer

Overview of Australias National Electricity
Market (NEM)
Recent major events in the NEM
Power System
Recent Trends in Reform

Australias National
Electricity Market
covers the Eastern and
Southern interconnected
electricity system



NEMMCO Market and System Operator

NEMMCO is the Market and System Operator for

the Eastern and Southern Australia (92% by
Operate the Market, determines prices and
settles the physical spot market
Operate the Power System, responsible for
power system integrity
Co-ordinates inter-regional transmission
Facilitates the operation of the retail market

NEM The Electricity Market

Gross pool (Compulsory)
Generator production levels and prices are set each 5 minutes by
NEMMCO on the basis of offer prices from Generators within a
constrained optimisation
30 minute trading interval (Spot) price in each of 6 regions
No physical delivery contracts as financial instruments (over the
counter CFDs or hedging contracts, futures contracts) between
participants manage the physical spot price risk
NEMMCO settles the cash spot market but does not settle the
financial instruments
Annual spot market settlement transactions in 2006/2007 of about
AU$11B (US$9.6B)
Settlement is weekly, 4 weeks in arrears (about 33 days

NEM - Cash Overview

Financial Market
(hedging contracts)


Settlement for
100% of


Settlement for
100% of energy

Spot Settlement

Physical (Spot) Market

NEM - Market Pricing

The NEM is a constrained real time (5 minutes exante) priced spot market
During disturbances prices will be volatile
Real time pricing generally aligns with dispatch of generation

Some aspects of NEM design have been developed

to drive long term investment but in an emergency
can break the linkage of pricing and dispatch
When load is shed and cannot be all restored the Market Rules
have the price being set to the Value of Lost Load ($10,000/MWh)
There are few reasons to direct generators that are not responding
to Power System needs but when generation is directed the
market is priced as if the direction had not been given

NEM Regions
6 Price Regions
Generators Paid Regional Price


Customers Pay Regional Price




Recent NEM Events

NEM performance has been sound over last 9 years.
Investment forthcoming
Competitive wholesale prices
Fierce retail competition

The IEA reported that the NEM is a competitive competitive and

effective electricity market
Survived two significant events this year but not without
opportunities for improvement

16 January 2007 2,200 MW of customer load interrupted

following bushfire transmission line faults
June 2007 major increase in prices leading to the
suspension of a retailer and the invocation of the Retailer of
Last Resort process

16 January 2007 Bushfire Event

Bushfires in Victoria for the previous 40 days
Maximum demand for year in Victoria about 9,200 MW
All interconnectors were at maximum flow into Victoria
Generation reserves adequate
Power System operated to cover for any single contingency
Two single circuit 330kV lines (same easement) from
NSW/Snowy to Victoria tripped and locked out of service
Six other transmission lines tripped out of service
System separated into three island systems
Victorian island had a major generation deficit
Automatic under-frequency relays interrupted 2,200MW of
customer load in Victoria and averted a major disturbance


Before the event









After the event



2200MW shed






16 January 2007 Outcomes System

All transmission line protections operated as designed
The automatic under-frequency load shedding effectively
controlled the Victorian low frequency and averted major
Victorian collapse
Most power stations maintained capability and
contributed to system management
There were no issues with the control of transmission
voltages in Victoria during the stabilisation period
South Australia reconnected to Victoria in 40 minutes and
all island systems were reconnected in 3 hours (delays as
the fire authorities would not give clearance for lines to be
restored for fire fighting and safety reasons)
All load restored in 4.5 hours


16 January 2007 Outcomes - Frequency


16 January 2007 Outcomes - Operation

Review the process to determine when to operate the Power
System to withstand a multiple contingency event
ie when to cover for the loss of two separate 330kV lines

Man machine interface Challenge to provide Operators with

rapid view
8 lines tripped across a wide geographic area
3 islands
Took some minutes to be clear on system state

Need to control multiple separate frequency control areas

Looking to more flexible systems

Market System flexibility

Need to continue to function and dispatch appropriate generation in an
islanded environment

Simulate these events for further training


16 January 2007 Outcomes - Market

Real Time Pricing in emergencies

Simplify Rules in an emergency do not require power
system operators to be considering market impacts
during disturbances as they are focused on Power
System security
Ensure incentives on generators align with Power
System need. By artificially setting a price to the
Value of Lost Load regardless of the generator offers
can create complex incentives and market outcomes.


16 January 2007 Outcomes

The power system responded well and the

event was contained
Some processes can be improved
Some Market design issues need to be


Financial Event Drought

Drought conditions had been worsening over the last 12 months

Some thermal generators put on standby to conserve cooling water

Most hydro generators with limited water
Greater gas fired generation
Spot and contract prices up by 80% since January 2007
High volume in futures contract trading
High wholesale prices made it difficult to source supply at
reasonable cost
Retailer stress due to regulated retail tariffs

NEMMCO commences publishing projected energy

assessments in addition to routine capacity (Supply/Demand)


Financial Event June 2007

June 2007 (Winter) was cold in South and East Australia
Some record electricity demands but within capability of supply

Large Generator (13% of NEM, 35% of NSW region) bidding

Pricing a substantial portion of its capacity at near VoLL just for the
peak period of the day

June 2007 prices in New South Wales

$230/MWh for month (Jun 2006 was $31.47/MWh)
42 half hours greater than $5,000/MWh


NEM Market Outstandings


Futures Contract Prices


June 2007 Event

Small retailer suspended from trading as it could not honour its
customer contracts
Two other retailers in obvious financial stress
Retailer of Last Resort (RoLR) enacted transferring 6,000
customers to a new retailer following suspension
Suspended retailer was co-operative
Smooth processes experienced


More efficient cash and settlement processes

Review length of Settlement cycle
Review effectiveness of netting spot and contract settlement
Test RoLR for very large customers numbers


Trends in Operation and Reform

Renewable Generation
Increasing wind generation greater need for increased wind
generation forecasting, more complex reliability assessment,
and network management complexities
Increasing gas generation

Integration of Gas and Electricity

Fuel balance implications under periods of heavy gas fired
electricity generation
Emergency management of both gas and electricity incidents
Many Retailers involved with both fuels
Trend to National market in both fuels
Australian Energy Market Operator (AEMO) to be formed from
July 2009 to combine NEMMCO and Gas Markets


Trends in Operation and Reform

National Approach to Transmission Planning
State planners have clear state reliability obligations
No clear obligations to benefit National trading
AEMO as a National Transmission Planner

Very large increases in data movement between the

Interval meter role out
Retail customer churn 25-30% in Victoria and South
B2B transactions


Overview of Australias National Electricity Market
Real time constrained gross market

Recent major events of the NEM

Tested process and showed opportunities for improvement

Recent Trends in Reform

Closer linkages between electricity and gas