The Supply Chain
Though straightforward in theory, the electricity supply chain is a complex platform.
Electricity generators create power from either fossil fuels (coal or gas) or renewable energy (solar, wind, hydro or other sources). Some generation is bulk for distributed use, other is small generation for their own use or to be exported (such as residential solar panels).
Distributors then purchase and distribute the power across transmission networks. In some areas outside the NEM, customers must purchase directly from the distributor.
Retailers then purchase and on-sell power to customers.
The commodity is delivered by network infrastructure in each state.
Spot Market – Trading & Dispatch
Interaction between producers and consumers is carried out on the spot market. All output from generators is aggregated and scheduled to meet demand through a central dispatch process. This process is operated by the Australian Energy Market Operator (AEMO) and can be seen live HERE.
Generators submit an offer every five minutes, the AEMO then determines the generation required to produce enough electricity to meet demand in the most cost-effective manner.
Dispatch prices are also determined every five minutes. This allows an average price to be calculated for spot price in half-hour trading intervals. And each region of the NEM.
A maximum spot price is set at $14,200 per megawatt hour. This price, commonly known as the Value of Lost Load (VoLL) is triggered in order to interrupt supply and maintain balance in the system.
Electricity Financial Trading Market
As spot markets are highly volatile, buyers and sellers can ‘lock-in’ energy prices using hedging contracts. Under a contract, the purchaser (e.g. energy retailer) agrees to purchase a volume at a set price. If the resulting spot price is higher than the set price, the counterparty continues the difference in cost. Conversely, if the resulting spot price is lower than the set price, the purchaser pays the difference in cost.
The electricity financial market is conducted via exchange trading on the ASX Energy and over-the-counter trading. T&O monitors this market daily and can offer advice regarding all facets of the market.