Briefing Note | February 2021

The National Electricity Market

Key Points

The National Electricity Market (NEM) is the term used to describe both the physical grid that links the eastern Australian states and the market system that trades electricity.
The NEM commenced trading as a market in 1998, linking the electricity systems of New South Wales and Victoria (via the Snowy Hydro Scheme), South Australia and Victoria via the Heywood Interconnector (1988) Queensland and New South Wales via the QNI (2001) and Victoria and Tasmania via the BassLink (2006).
The NEM is framed by National Electricity Rules which are required to meet a National Electricity Objective (NEO). Three key agencies have been created to manage the NEM: the Australian Energy Market Commission (AEMC) (the rule maker and policy adviser), the Australian Energy Market Operator (AEMO) (the market operator) and the Australian Energy Regulator (AER) (the regulator).
In 2017 the Energy Security Board was created to implement the reforms recommended by the Finkel Review. It has evolved to become a co-ordinating policy body for the three energy market agencies.
The NEM is a gross pool, energy-only market. Gross pool means all the electricity is traded through a single, centralised, trading platform run by AEMO. In the NEM electricity is sold by generators and bought by retailers and large industrial customers.
To manage natural volatility in an energy-only electricity market, sophisticated futures markets have evolved to reduce risk for both buyers and sellers.
Ancillary services – frequency control, inertia and system strength – have become increasingly important in the 21st century as intermittent renewable generation is replacing conventional 20th century thermal generation.

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