Most electricity in Australia is generated, bought, sold and transported in markets that need to match supply and demand in real time. The National Electricity Market (NEM) fills this role for the east coast and southern states.
The NEM is one of the largest interconnected electricity systems in the world. It covers around 40,000 km of transmission lines and cables, supplying around 9 million customers.
The NEM is a wholesale market through which generators and retailers trade electricity in Australia. It interconnects the six eastern and southern states and territories and delivers around 80% of all electricity consumption in Australia.
Western Australia and the Northern Territory are not connected to the NEM. They have their own electricity systems and separate regulatory arrangements.
How the NEM works
The NEM facilitates the exchange of electricity between generators and retailers. Retailers resell the electricity to businesses and households. High voltage transmission lines transport the electricity from the generators to electricity distributors, who deliver it to homes and businesses on lower voltage ‘poles and wires’.
The wholesale market is where generators sell electricity and retailers buy it to on-sell to you. There are lots of generators and retailers participating, so it’s highly competitive. The wholesale market operates around a common pool, or spot market, for wholesale trading in physical electricity. This process determines an electricity spot price which reflects physical supply and demand across the NEM. This spot price is an important price signal for investors.
Financial markets sit alongside the wholesale market and involve retailers and generators entering into contracts to buy and sell electricity at an agreed price. The financial markets enable retailers to manage the risk of volatile wholesale prices for their customers.
Management of the NEM
Energy Ministers are the key decision maker with policy and governance responsibility. The Australian Energy Market Commission (AEMC) develops the rules by which the market must operate. The Australian Energy Market Operator (AEMO) handles the day-to-day operations of the electricity and gas markets. The Australian Energy Regulator (AER) enforces the rules and makes judgements on the regulatory proposals of monopoly network operators.
The Energy Security Board (ESB) was established by the former COAG Energy Council to coordinate the implementation of the reform blueprint produced by Australia's Chief Scientist. Part of the role is to report to the Energy Council on the health of the NEM. The health report will track the performance of the system, the risks it faces, opportunities for improvement and affordability issues.
The NEM is changing
The NEM needs to be modernised to accommodate and respond to changes in electricity generation, emerging technologies, such as solar batteries, and shifting consumer preferences.
The government’s long-term energy policies are being informed by recommendations of the Australian Competition and Consumer Commission (ACCC). These are included in its Retail Electricity Pricing Inquiry and the Independent Review into the Future Security of the NEM reports. They provide a blueprint for ensuring Australia’s energy systems remain affordable, reliable, sustainable and secure while transitioning to low emission forms of generation.
Post-2025 market reforms
In 2018, the Australian Government, alongside the state and territory governments, tasked the Energy Security Board with providing advice on a long-term, fit-for-purpose market framework to support reliability that could apply from 2025.
The Post-2025 Market Design project was established to oversee and coordinate this body of work, which is taking a holistic look at the changes required to ensure the NEM can meet the needs of electricity consumers in a future of diverse sources of non-dispatchable generation, demand response, storage, and distributed energy participation.
Further information is at Post-2025 Project Microsite
The Australian Competition and Consumer Commission Retail Electricity Pricing Inquiry
On 27 March 2017, the Treasurer issued a notice requiring the Australian Competition and Consumer Commission (ACCC) to hold a public inquiry into the supply of retail electricity and the competitiveness of retail electricity prices in the NEM. The inquiry formally commenced on this date.
The final report, released on 11 July 2018, sought to identify the root causes of high electricity prices across the entire electricity supply chain, and made 56 recommendations aimed at improving electricity affordability for Australian consumers and businesses.
The government continues to work with states and territories in progressing many of these recommendations, and has already taken action to drive down prices through implementation of the ACCC recommended default offer price safety net.
The government has also tasked the ACCC to continue to monitor prices, profits and margins in the supply of electricity in the NEM. As part of this ongoing inquiry, the ACCC is required to report to the government at least every 6 months until the conclusion of the inquiry on 31 August 2025.
About Energy Ministers Australian Government
Energy management for business Australian Government
Quick wins - Energy basics for households Australian Government
Consumer rights (AER) Australian Government