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What is the spot market and the spot price?

Understanding the spot market and spot prices is fundamental to understanding how much you ultimately pay for electricity.

The National Electricity Market (NEM) operates as a ‘spot market’.  This means that supply and demand are matched instantaneously, and generators are paid a spot price for the energy they generate in any given period.

The Australian Energy Market Operator (AEMO) manages the spot market, balancing supply and demand in real time. With the safe delivery of energy the priority, AEMO controls a number of physical aspects of the market which ultimately impacts which generators are dispatched, and what spot price is achieved.

AEMO provides the market information regarding how much demand is expected. Generators compete to supply this energy by providing a bid stack to AEMO that ultimately tells the market operator how much energy they are prepared to generate for a given price. AEMO aggregates all the bid stacks from cheapest to most expensive, manages the physical requirements of the system (which stands to impact some generation with constraints, ancillary services, interconnector flows, etc.), and sets the spot price in a region at the lowest price where actual demand intersects the relevant bid stack. . All supply at and below this level is required to generate and will be paid the spot price.

Supply and demand is physically managed by AEMO varying the market in 5-minute dispatch intervals. For the purpose of financially settling the spot market, it is done in 30-minute trading intervals (an average of the six 5-minute dispatch intervals). This means the spot market currently operates in a way that physical dispatch and financial settlement are determined over different timeframes. The market was designed in this manner to incentivise slow ramping thermal generators and large users to benefit from changes to load up to 25 minutes after the price signal has been sent.

The spot market and the setting of spot prices is highly complex and governed by stringent rules for both bidding and dispatch processes (all of which go well beyond the high-level principles outlined in this article). Despite this, the dispatch and settlement timing mismatch has led to disorderly bidding practices whereby generators have been accused of ‘gaming’ the market. The Australian Energy Market Commission (AEMC) determined that in the long-term, the pricing anomaly may lead to inappropriate investment and higher prices for consumers.

Consequently, in a move to further enhance the market, from 01 July 2021 the market will start to move to 5-minute spot pricing. This means dispatch and financial settlement will be aligned, disorderly bidding will be managed, and fast response technologies such as batteries will be rewarded.