The Supply Chain
The electricity supply chain, while straight-forward in theory, displays a complex path. Generated electricity is bought in bulk by retailers on the wholesale market platform. Retailers then on-sell to end users. The commodity is delivered by network infrastructure in each state. Theoretically, each stage represents an individual stakeholder, incurring a cost at each point.
Complexities arise when in reality a company may be representing one, some or all of these stages simultaneously. For example, a network may also act as a retailer, or a retailer may generate their own electricity. These situations occur in various ways in each state and therefore affect market choices and prices for end users in those regions.
Spot Market – Trading & Dispatch
Interaction between producers and consumers is facilitated on the spot market, whereby all output from generators is aggregated and scheduled to meet demand through a centralised dispatch process. This is operated by the Australian Energy Market Operator (AEMO).
Generators submit an offer every five minutes, the AEMO then determines the generation required to produce enough electricity to meet demand in the most cost-effective manner. Dispatch prices are also determined every five minutes, allowing an average price to be calculated for spot price half-hour trading intervals in each region of the NEM. A maximum spot price is set at $12,500 per megawatt hour. This price, commonly known as the Value of Lost Load (VoLL) is triggered in order to interrupt supply and maintain balance in the system.
Electricity Financial Trading Market
As spot markets are highly volatile, buyers and sellers can ‘lock in’ energy prices through financial hedging contracts. Under a contract, the purchaser (e.g. energy retailer) agrees to purchase a volume at a set price. If the resulting spot price is higher than the set price, the counterparty continues the difference in cost. Conversely, if the resulting spot price is lower than the set price, the purchaser pays the difference in cost.
The electricity financial market is conducted via exchange trading on the Sydney Futures Exchange and over-the-counter trading. T&O monitor the market daily and can offer advice regarding all facets of the market.
It is not only the quantity of electricity consumed by a user that affects pricing, but also the way in which it is used. A demand profile indicates how electricity is used over a period of time. There are natural peaks and troughs in each profile that shape the consistency of its load. Retailers value more consistent profiles due to the ability to better forecast its impact on the overall supply.
‘Peakier’ loads require more unpredictable levels of supply, a particular concern during peak consumption times. Retailers consider ‘peakier’ loads to carry a higher risk factor due to their potential to cause strain on supply and increase demand charges accordingly. Business consumers can manage their demand in various ways (such as staggering operations throughout the day) in order to incur a lower demand charge.
Times of extreme weather (winter and summer) coincide with times of high demand for energy (heating and cooling). As demand for energy increases, so does its commodity cost. Contracting outside of these periods allows businesses to secure more competitive base rates, uninfluenced by short-term events.