Pricing wholesale electricity in Australia

You might not realise this when you flick your switch at home, but Australian electricity generators are forever locked in a bidding war. They compete for the right to supply electricity on the spot market. The cheapest bids win and electricity from those generators is supplied, or ‘dispatched’, to the grid in five-minute intervals.

Until recently, the price paid for wholesale electricity (the settlement price) on the Australian National Electricity Market (NEM) was averaged over six five-minute intervals (30 minutes). When supply started to fluctuate more wildly with the advent of intermittent renewable energy, so did the bidding war. Some generators started gaming the system, pushing prices sky-high. Retailers complained.

To combat this, the NEM finally introduced a five-minute settlement in October 2021. It was expected wholesale electricity prices would settle down, coal to lose market share, and batteries to boom.

But what actually happened? 

Analysis by UTS Finance Department researchers, PhD student Muthe Mathias Mwampashi, Associate Professor Christina Nikitopoulos and Dr Alan Rai from their paper ‘From 30- to 5-Minute Settlement Rule in the NEM: An Early Evaluation’ has been reported in both The Conversation and RenewEconomy. Their analysis reveals the average spot price went up, not down, in Tasmania, Queensland, and New South Wales. Black coal-fired generators made more money on the spot market, not less. Flexible generators, especially batteries, did well too (In the other NEM states, South Australia and Victoria, there was no significant change).

Further changes are needed to achieve the desired effects. These include increasing competition in the market (reducing the power of the three biggest electricity generators), building the infrastructure needed to support a green grid, and investing in more flexible and fuel-efficient technologies.