The competitive market for electricity in Australia: why it works so well

The National Electricity Market is the centerpiece of the Australian restructured electricity industry. It is a spot market in which prices are determined an a five-minute basis but half-hour averages are used for commercial transactions. The five-minute prices are broadcast to participants so that they can respond while the prices are still avoidable. An approximate form of nodal pricing is used. This market has proved to be an effective design in terms of competition between generators, but is as yet far from perfect. The need for evolution in market rules was recognized in the market implementation, and refinements to the design may be expected for some years to come. The paper discusses key issues involved in the implementation of competition in the electricity industry and then discusses strengths and weaknesses of the Australian National Electricity Market design. Suggestions are made as to how the market design might be improved.