How the Electricity Market Functions in South Australia

By William Abbott, University of Adelaide

Everyone uses electricity but not many people know exactly how electricity is distributed. In Australia, the electricity industry is privatised and so each generator is run by a team and registered with the Australian Energy Market Operator (AEMO). At an incredibly small time interval of 5 minutes, each registered generator sends in bids to AEMO on the quantity of electricity they can produce in the next 5 minutes and at what price they can generate that electricity. It is then up to AEMO to use this information to choose generators to produce electricity for South Australia in order to minimise the total cost.

However, in order to ensure that demand and supply is met, the generators need to know how much energy they have to produce. That is where AEMO’s market model comes into play. They have many inputs including but not limited to: regional temperatures, type of generator and season. All these inputs are used to approximate the total amount of electricity that can be supplied by each generator, in order for AEMO to determine whether they need extra generation or are over-supplied. They do this by comparing their supply model to the demand projections which are determined by metering supply to the network. Of note is that this way of measuring demand includes energy loss in transmission and other losses that occur before the energy is used by consumers. Once demand and supply are met, this becomes the spot price of electricity at that particular time. The spot price, calculated by the total cost of electricity generation over a period of time divided by the generation amount, is the price that the retailers will pay for electricity, measured in dollars per Megawatt-hour.

Whereas AEMO acts as the governing body of the electricity market, the National Electricity Market is the main workhorse of the buying and selling aspect of electricity, and is where the retailers buy the electricity from to sell it on to consumers. This is why it is of the utmost importance to be able to match demand and supply all the time, as any deviation can result in a spike or drop in spot price, which will negatively affect the consumers and the retailers respectively.


William Abbott was a recipient of a 2018/19 AMSI Vacation Research Scholarship.

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