Overview of the Australian Electricity Market

The Australian National Electricity Market (NEM) physical (i.e. spot) market

The National Electricity Market (NEM) is an interconnected grid comprising several connected regional networks and approximately 35,500 MW of installed generation. The NEM operates across the eastern states of the mainland, and includes the state grids of Queensland (QLD), New South Wales (NSW), Snowy, Victoria (VIC) and South Australia (SA). Tasmania (TAS) is connected to the other NEM regions via an undersea inter-connector to Victoria. Futures and options contracts are listed on the 4 major regions (VIC, SA, QLD and NSW).

Each state region publishes a half-hourly spot pool price for electricity based on a gross pool merit order dispatch system.

This spot price (and the price of futures contracts) provides the market signals for investment in new generation and competitive responses from new entrant retail suppliers, which benefit energy consumers.

The dcypha SFE Electricity Futures and Options Market

It is against this published pool price that all derivative products, such as futures are (cash) settled on contract expiry. Base load futures are cash settled with reference to the average of every half hour of the relevant quarter, while peak load futures are cash settled with reference to the average of only those half hours during the quarter between 7am to 10pm on working weekdays.

The financial derivatives market has developed based on fixed for floating swap contracts settled against the spot price and facilitates trading on a region specific basis. The Australian market is one of the few purely cash settled electricity markets (i.e. financial contracts do not involve physical delivery of electricity) which enables participants such as hedge funds and banks to participate in the financial market and contribute to market liquidity without a requirement to own physical generation assets.

Electricity futures contracts are listed on a calendar quarter basis out to 4 years ahead and also trade in 1 year tranches via defined Calendar Year and Financial Year Strip Products. Products traded include exchange traded swap futures (also $300 cap futures) and options on swap futures, providing the facility for credit-clean option position taking.

A large volume of OTC negotiated business is brought to the SFE for clearing and registration by brokers and/or trading clients via the SFE Block Trading mechanism. Additionally, the exchange-for-physical mechanism enables OTC hedge contracts to be switched into futures via registration on the SFE Clearing Corporation.

For further information relevant to the spot market for electricity. Please got to the industry links section of the d-cyphaTrade website.