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Glossary of Terminology

Index

Overview

Terminology

An Overview of the NEM

Australia’s National Electricity Market (NEM) operates on a regional basis.

The NEM incorporates the wholesale trading of electricity in the interconnected eastern states of QLD, NSW, VIC, TAS and SA. WA and NT are not part of the NEM as they are not physically interconnected to the eastern states.

It is important to note that the NEM is operated on Australian Eastern Standard Time (GMT + 10 hours) - which means NO daylight savings. All data published by NEMMCO (and hence displayed in NEM-Watch) is time-stamped on this basis.

The NEM is a compulsory wholesale market for electricity (in industry terminology this is sometimes called a "gross pool" as distinct from a "net pool" which is the structure used in some other electricity markets). What this means is as follows:

  • All electricity generated in the NEM (from facilities above a certain size) is traded through the NEM spot market, which is operated by NEMMCO (this is sometimes termed the "physical market" and is synonymous with a "pool" or "balancing" market);

  • To manage the risk inherent in trading in any electricity market, wholesale market participants also participate in the financial market for contracts referenced to the spot price. These might be negotiated bilaterally, or purchased through over the counter (OTC) trading facilitated by any of a number of brokers, or purchased in the form of the electricity futures contracts traded on the Sydney Futures Exchange.

If you would like further information about the commercial structure of trading in the NEM, our Power Trading Schematic Market Map™ provides a clear picture - for further information see the maps portal at www.marketmaps.info.

NEM-Watch has been designed to provide a clear view of the nature of trading in the physical market for electricity.

NEM-Watch also does provide a view of some aspects of the financial market, however this is fundamentally more difficult as trading in the financial market does not operate through a central body (as it does through NEMMCO in the physical market).

Terminology Used in the NEM

The following terms have been sorted in alphabetical order:


Ancillary Services

The NEM operates on a dispatch interval basis. This is how the bulk of the trading is done, and the energy delivered.

However NEMMCO needs to be able to access other services (called Ancillary Services) in order that the physical electricity supply system stays stable. The following are the broad categories of Ancillary Services used in the NEM:

  1. Frequency Control Ancillary Services (FCAS) are purchased by NEMMCO through a spot market operated in conjunction with the spot market for energy. FCAS market data is also updated through NEM-Watch;
  2. Network Control Ancillary Services (which are procured on a longer term bilateral contract basis); and
  3. System Restart Ancillary Services (which are procured on a longer term bilateral contact basis).

Further information about the Ancillary Services used in the NEM is available here:

http://www.nemmco.com.au/ancillary_services/ancillaryservices.htm

Demand

The demand for a region or the NEM is defined by the average of the total electricity which will be produced in the interval, taking into account load, losses and the forecast change in demand over the interval.

It is important to note the following distinctions:

  1. The NEM is dispatched on an as-generated basis (sometimes also called "gross" basis) - which means that the demand figures incorporate both generator auxiliary power used onsite AND transmission losses;
  2. The demand figures reported through NEM-Watch are instantaneous measures of magnitude, and not measures of volume (i.e. they are MW and not MWh).

For a detailed technical definition of demand, see the NEMMCO pdf on the subject.

Frequency Control Ancillary Services (FCAS) data

FCAS services are purchased by NEMMCO, predominantly from generators, to provide short-term changes in output in order to keep the frequency of the system at 50Hz (3000rpm).

There are 8 commodities purchased by NEMMCO

Raise the Frequency

Lower the frequency

Respond continuously to "normal" changes in frequency

Raise regulated

Lower regulated

Respond in 6 seconds to a contingency event

Raise 6 second

Lower 6 second

Respond in 60 seconds to a contingency event

Raise 60 second

Lower 60 second

Respond in 5 minutes to a contingency event

Raise 5 minute

Lower 5 minute

The Raise commodities would be used, for instance, if a large generator tripped offline and the whole system "slowed down" by virtue of the inertia of the large loads on the system operating as brakes on the cycling of the generators.

The Lower commodities would be used, in contrast, if a large load (e.g. major smelter) tripped offline and the whole system "sped up" by virtue of the larger than necessary amount of generation being pushed onto the grid.

Such disruptions would be addressed in the energy market beyond the current dispatch interval, however NEMMCO requires these services available in order that the system does not "spin" unstably and cause catastrophic failure within a 5-minute period.

Generators

Under the rules of the NEM, generator output is deemed as confidential and, as such, is only released to the market on the day-after trading.

If you would like to access the generation output (and availability) on a historical basis, we’d recommend you have a look at the companion product, NEM-Review, which is described on its own portal (www.nem-review.info).

However NEMMCO does publish some generator availability, aggregated for each region, on a real time basis. This data is updated through NEM-Watch.

The aggregated generator availability for a given region is the sum, across all Scheduled capacity in that region, of the total amount offered to the market in the dispatch/trading interval in question, regardless of offered price. As such, this measure of available capacity will incorporate a volume of capacity offered to the marked at, or near, the pool price cap of VOLL.

Registered Generators

All generators larger than 30MW in size (and some smaller ones) are required to register with NEMMCO and be scheduled through NEMMCO’s spot market. In addition, some smaller generators choose to also register with NEMMCO for a variety of reasons.

Registered Generators can be Market (or Non-Market) and Scheduled (or Non-Scheduled), making 4 classification options in total - though most are either Market Scheduled (the big ones), or Non-Market Non-Scheduled (the small ones).

For a listing of Registered in the market, please see the listing compiled by NEMMCO, and updated on a regular basis:

http://www.nemmco.com.au/registration/888.htm

Alternatively, for a pictorial view of the generation capacity physically installed in the market, our Power Supply Schematic Market Map™ provides a clear picture. Further information about the series of maps is provided at the portal ( www.marketmaps.info).

Market (and Non-Market) Generators

A Registered Generator can be classed as Market (i.e. will be paid the spot price for electricity generated) or Non-Market (i.e. is contracted external to the market on a Power Purchase Agreement (PPA) and hence does not see the spot price for electricity).

In general terms, all large generators will be classified as Market Generators.

Scheduled (and Non-Scheduled) Generators

A Registered Generator can be classed as Scheduled (i.e. must bid into NEMMCO its entire available capacity and dispatch based on NEMMCO’s dispatch instructions) or Non-Market (i.e. smaller units are allowed to dispatch whenever they please and are not required to participate in the dispatch process).

In general terms, all large generators will be classified as Scheduled Generators.

Instantaneous Reserve Plant Margin (IRPM)

The Reserve Plant Margin (RPM) is a commonly used metric to indicate the level of balance between available supply and demand for an electricity market. It is calculated as follows:

The RPM (expressed as a percentage) has been traditionally used with a longer-term planning focus (i.e. looking at the surplus of installed capacity in the market over the forecast peak demand for the market in a given year).

We have taken the step of translating RPM into an instantaneous measure (i.e. Instantaneous Reserve Plant Margin - IRPM) by translating the formula as follows:

It is important to note that the market will typically run at lower IRPM than would be accustomed to being reported for RPM as the IRPM formula does not take into account installed capacity that is unavailable at any particular time period.

Interconnectors

Inter-regional interconnectors are the backbone of the NEM. They provide for the physical transfer of electricity between regions of the NEM.

In general terms, the power will flow from lower-priced regions to higher-priced regions (though it should be noted that this does not always occur for various reasons). The amount of the flow will be somewhere between an import limit and an export limit, with the amount of the flow scheduled in each dispatch interval determined by NEMMCO through the use of NEM-DE.

By default, NEM-Watch will show interconnector flow (and constraint limits) on the basis of NEM standard methodology. As such, the number sign for interconnector flow (and losses) is defined as being from the south-east.

i.e. think of it as being Hobart-centric - flows to the North and West are positive, whereas flows to the South and East are negative.

For more information on interconnector constraints, see the description provided by NEMMCO at the following address:

http://www.nemmco.com.au/dispatchandpricing/173-0200.pdf.

Interconnector Constraint

The interconnector is deemed as constrained if the flow is equal to either the import or export constraint limit on the line for that dispatch interval.

Within NEM-Watch, an interconnector arrow will turn red if the flow is constrained.

Remember that the flow and limits are published (and updated) to several decimal places, whereas only the whole numbers are shown in NEM-Watch.

Interconnector Flow

The interconnector flow, as determined in NEM-DE and displayed in NEM-Watch, is the value of the flow calculated as that which will be flowing at the end of the dispatch interval.

Note that the flow is NOT a metered value. This is the case for flow (and, indeed, for all data updated in NEM-Watch) as that information is not released to the market in real time.

Interconnector Import & Export Limits

The import limit published from NEM-DE and displayed in NEM-Watch is the amount of power that could be imported into the region on the south-eastern end of the interconnector.

The import limit will vary from one dispatch interval to the next based on a wide range of different parameters that reflect the complex nature of balancing supply and demand in the physical electricity supply system.

These limits can, on occasions, be of the same sign, if NEMMCO has used certain constraint equations as an input to the NEM-DE dispatch process.

Interconnector Losses

In the physical transfer of power across interconnectors (within AND between regions) losses occur due to the heating of the transmission line:

Losses occur in an i2R relationship - meaning that losses increase quadratically as the current on the line increases

The rules of the NEM are written such that, unless an inter-regional interconnector is constrained, the spot price in neighbouring regions will vary by a mathematical representation of the amount of power being lost at that level of energy transfer over the line.

Intervals

It is important to note that the NEM operates on a number of different time intervals. Data for some of these intervals is displayed within NEM-Watch.

Each interval serves certain purposes - and hence it is important to ensure that you understand the differences between the intervals.

Dispatch (5-minute) Interval

The NEM is physically dispatched on a 5-minute basis.

In dispatching the market, NEMMCO will issue dispatch targets to all Scheduled generators at the beginning of the dispatch interval (e.g. at 01:00:01) what each generator should be producing at the end of the dispatch interval (e.g. at 01:05:00).

To do this, NEMMCO estimates what the demand will be at the end of the dispatch interval and uses this, and the generators offers (called "Bids" in the NEM) to supply, as inputs to the NEMMCO Dispatch Engine (NEM-DE for short).

To ensure the physical system is stable within a given dispatch interval, NEMMCO will alter the dispatch of contracted plant supplying into the FCAS market.

Trading (30-minute) Interval

Whilst the market is dispatched on a dispatch interval basis, the physical market actually trades on a 30-minute basis.

Trading data is derived as the time-weighted average of the 6 x 5-minute dispatch data points within the relevant trading interval. Hence, the trading price for a trading period will not be known, with certainty, until 25 minutes into the trading interval.

Predispatch (30-minute) Intervals

To enable the market to understand how the market might behave out till 4am tomorrow or (from 13:00 each day) out until 4am the day afterwards, every 30 minutes NEMMCO will release a predispatch forecast out that far into the future.

To derive the predispatch forecast for price, NEMMCO estimates the trend in demand (based on current weather forecasts) and applies the current generator bids to produce a forecast of trading prices into the future.

This predispatch data is accessible in NEM-Watch Silver Model and above - and can be viewed in the main chart, through the display in Playforward mode, and can be routinely checked through local alarm configuration.

For more information on the use of predispatch data, see the NEMMCO document at:

http://www.nemmco.com.au/dispatchandpricing/mo_di554v002.pdf.

Predispatch (5-minute) Intervals

To provide even greater detail to the market, each 5-minute period NEMMCO will update a predispatch forecast of dispatch prices out 60 minutes into the future.

This forecast is NOT available in NEM-Watch - however we can provide access to this forecast through other products. Please contact us if you would like to learn more.

NEMMCO

The National Electricity Market Management Company (NEMMCO) is a not-for-profit company established by the state and federal Governments to operate the NEM. Further information about NEMMCO is available from their website:

www.nemmco.com.au

It should be noted that NEMMCO does not make the rules of the market, it merely implements the rules, as they have been determined by other parties.

NEM-DE

The NEM Dispatch Engine (NEM-DE) is the algorithm used by NEMMCO to dispatch the market.

It is a Linear Program that takes, as input, parameters including generator bids and availability, and estimated demand, along with a wide range of physical and commercial constraints on the market, and calculates a least-cost outcome to the whole of the market (i.e. minimizing the total cost of energy to the market).

There is no look-ahead function within NEM-DE (i.e. in finding the least-cost solution for a certain dispatch interval, NEM-DE will not take into account the required state of the market in the dispatch interval following the one of immediate interest).

Regional Market

The regional market structure adopted in the NEM is part-way between a uniform postage-stamp pricing across the whole of the market and a fully nodally-priced outcome that is adopted for some markets internationally (and advocated, by some, for the NEM).

Under the regional market design, the NEM has been broken down into discrete geographical regions that (because of the way in which the transmission system has been developed historically in Australia) corresponds mostly to state boundaries.

In theory, regional boundaries are drawn across transmission links (interconnectors) where constraints occur frequently. This is done due as spot prices are allowed to diverge between regions (but not within a given region) due to the presence of transmission constraints.

Currently the NEM is comprised of 6 regions which mostly correspond to the state borders. In addition, a Snowy region has been defined to encompass the generation capacity of the Snowy Mountains hydro scheme and to externalize the constraints that occur between the Snowy scheme and the loads in Victoria and NSW (as such it is a region with little load but approximately 3700MW of generation capacity).

Weather Data

NEM-Watch also updates a range of weather data for large population centers in NEM states. This data is accessed from the Bureau of Meteorology (BOM):

The BOM asks that we point you in the direction of their disclaimer:
http://www.bom.gov.au/other/disclaimer.shtml

Four data sets are updated, as these are the ones with most relevance to the operation of the NEM:

Temperature (and how it affects the NEM)

Temperature has several impacts on the operations of the NEM:

  • Obviously, the level of demand for electricity varies with temperature (in the hotter months, high temperatures increase the demand for, and loading of, air-conditioning units for both business and residential sectors, whilst in the colder months, colder temperatures will increase the demand for, and loading of, electrical heating);
  • In addition, higher temperatures tend to reduce the efficiencies (and maximum capabilities) of thermal power stations because of the increased difficulties faced in cooling feed-water temperatures sufficiently.

Humidity (and how it affects the NEM)

Similarly, humidity affects both the supply-side and the demand-side of the market:

  • In higher humidity, the incidence of air-conditioner loading is greater than would be the case under lower humidity conditions (assuming the same temperature) because of both the poorer efficiency of cooling achieved, and also the decreased comfort factor for individuals in these more humid conditions (i.e. people will turn on air-conditioners sooner in more humid weather).
  • Also, the efficiencies and maximum capabilities of thermal power stations are also adversely affected by higher humidity, because of poorer heat transfer capabilities in cooling.

Wind Speed & Direction (and how it affects the NEM)

Wind speed and direction are also updated by, and published in, NEM-Watch.

Whilst wind speed provides a very obvious link to the amount of energy generated at any point in time by the increasing number of wind turbines being installed around the NEM, the wind patterns also impact on demand by varying a person’s level of comfort in various levels of temperature and humidity.

Wholesale Electricity Price Index (WEPI)

The Wholesale Electricity Price Index (WEPI) was developed by d-cyphaTrade following a request by the Federal Department of Industry Tourism and Resources.

The WEPI was developed in order to provide a truer indication (in the public domain) about the average cost of energy to retail energy users. This is necessary as, whilst the wholesale spot price is published (and updated through services such as NEM-Watch), there is not as much transparency in terms of the financial market. Specifically:

  • The market is not aware of the total level of financial contracting (whether it be through bilaterals, OTC or futures trading) in the market;
  • The market is not aware of the average price paid in all of these hedging transactions.

The WEPI was developed to provide, for each business day, a volume-weighted, trade-weighted average cost of wholesale energy across both the physical and financial markets.

For more information on WEPI data and methodologies used in calculating it, see the d-cyphaTrade article at
http://www.d-cyphatrade.com.au/products/wepi.

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