Dec 13 2018

Happy 20th Birthday National Electricity Market

Today the National Electricity Market (NEM) turns 20. Regardless of whether you subscribe to “the NEM is broken” catchphrase, it unarguably revolutionised our energy industry and was a major event in this country’s economic development.

On 13 December 1998 the NEM Management Company (NEMMCO) took over the controls of the power system in Queensland, New South Wales, Victoria, South Australia and the Australian Capital Territory; and the National Electricity Code came into force. It is a sad reflection of the market’s current lack of conviction that this milestone is passing with little recognition.

However this was not always the case. The NEM’s tenth anniversary was celebrated at NEMMCO with embossed gifts. And on its fifteenth anniversary, the Australian Energy Market Commission (AEMC) and KPMG published a historical account of the NEM’s formation called “A case study in successful microeconomic reform”[i]. Until recently such a title invited no irony.

While it draws many local criticisms, when viewed as a whole the concept was a remarkable achievement and remains feted internationally as an excellent model.

Here we take a trip down memory lane.

Where did we come from?

Prior to the 1990’s, all electricity supply came from state government-owned, vertically-integrated utilities. Assets were owned by themselves, local governments and private firms fully contracted to the utility. By the late 1980’s many of these utilities were seen as greatly inefficient, and poor planning had committed their states’ treasuries to large unnecessary investments.

In 1990 Victoria’s State Electricity Commission (SEC) supplied a maximum demand of about 6,000 Megawatts with over 20,000 employees. It was known as “Slow, Easy, Comfortable” to its staff with work practices demarked across over 20 unions. Meanwhile customers experienced an average of 510 minutes off supply a year as opposed to 140 minutes now[ii].

New South Wales, Victoria and South Australia had interconnected, however these links were only opportunistically used to reduce fuel costs when it suited both parties. States very much looked to develop their own patch.

In 1991 the Industry Commission (now the Productivity Commission) strongly criticised the industry’s performance and recommended[iii]:

  • vertical separation of the competitive and natural monopoly grid elements;
  • competition in each of generation and retailing;
  • progressive privatisation; and,
  • extending the interconnection to Queensland and Tasmania when economic.

This direction was supported by the 1993 Hilmer competition review[iv] and the concept of relying on electricity markets rather than central planning was born. It was helped by the lead of the United Kingdom, which was transforming its industry along similar lines, several years ahead of us.

But most importantly, it was a time of enthusiastic support for hard micro-economic reforms due to politicians such as Keating, Stockdale, Egan and Lucas who saw benefits that would not be realised until long after their own terms of government.

Privatisation was never a requirement of the NEM – many government-owned businesses continue to compete in it today – but an electricity market was seen as a necessary platform by which government could, if it wanted to, exit its financial exposure to the industry. During the 1990’s the Victorian and South Australian governments had parlous financial circumstances, which undoubtedly accounted for some of their enthusiasm. The Victorian energy privatisations of the late 1990’s were particularly successful, fundamentally transforming that state’s financial situation and economic confidence, resetting its economy from what had been a rust-belt towards two decades of nation-leading prosperity. 

Developing the NEM

The National Grid Management Council (NGMC), chaired by John Landels and project managed by recently retired AEMC commissioner, Neville Henderson, designed a market that provides much of the framework the NEM continues to operate on, with:

  • retail choice;
  • non-discriminatory access to the grid;
  • equal treatment of new-entrants and incumbents; and,
  • equal treatment of intra and inter-state trade.

In order to reasonably manage the transition, retail choice was introduced progressively, and generators and retailers were allocated “vesting contracts” that declined as retail competition took hold.

From the mid-1990’s industry gained experience with these radical concepts firstly with a series of paper trials, then some more serious pre-NEM markets, with names such as “Vicpool”, “ELEX” and “NEM1”.

In an example of the wheel turning with nothing new, a key debate held in the mid-1990’s was whether to follow the UK preference of an energy-only market or the US preference of separate energy and capacity markets. The NGMC followed the UK’s lead, and also other areas like applying incentive-based, or “CPI-x”, regulation of monopoly assets with five-year price caps. And also by allowing generators to self, rather than centrally, commit their units from day to day.

The NGMC wrote the design in the National Electricity Code, which mostly lives on into what we call the NEM rules today. They knew the arrangements would need to evolve, so they created the National Electricity Code Administrator (NECA) to handle rule changes. Transmission regulation was performed by the Australian Competition and Consumer Commission (ACCC), while Distribution and Retail regulation were performed by state regulators. This whole structure was empowered by the National Electricity Law (NEL), legislated in South Australia and reflected into each participating jurisdiction’s Electricity Act. 20 years into the national market, the NEM remains legally a state function.

NEMMCO came into being in 1997 and began operating the “Queensland Interim Market” using NEM-style dispatch from early 1998. Unfortunately this coincided with an unrelated period of load-shedding and the market had to be briefly suspended and re-started. The NEM itself had a number of missed starts through 1998, caused by IT delays, and although NEMMCO’s trial systems were far from perfect, in November the industry finally agreed to start on 13 December 1998.

We held our breath, but the NEM cutover occurred without a hitch and NEMMCO’s IT systems performed well right through that first year. 12 months later, Y2K was also a fizzer.

Key developments since

While much of the fundamental design remains intact, there have of course been countless changes and external events since 1998 that have greatly affected its character. Some worth mentioning are:

  • The ultimate achievement of full retail competition. In 1998 most people would have ridiculed the idea of choosing their own electricity retailer.
  • Governance changes:
    • In 2005 the Code became Rules subordinate to the NEL. NECA was abolished and the AEMC created to manage them.
    • The Australian Energy Regulator was created and took over all network and generator regulation, and, in time retail regulation from NECA, ACCC and the states.
    • In 2009 NEMMCO merged with several gas market operators to become the Australian Energy Market Operator (AEMO).
    • In 2017 the Energy Security Board (ESB) was created to attempt to co-ordinate the other institutions and recommend expedited changes to governments.
  • Changes to industry structure:
    • Greater roles for the private sector through privatisations and entry.
    • The original structure of distributors being stapled to retailers has all but disappeared as investors choose to focus on either regulated or competitive business.
    • The “gentailer” model where some investors prefer to link generation with retailing.
  • A rocky road of federal and state environmental policies, particularly the National Renewable Energy Target (RET), the Queensland gas scheme and a short-lived federal carbon pricing scheme, along with other aborted attempts.
  • The export-linking of the east-coast’s gas markets from 2015.

The most significant technical changes worth mentioning are:

  • The introduction of frequency control ancillary services (FCAS) markets in 2001. Even now, perhaps no other electricity market has so completely integrated FCAS with energy.
  • The connection and inclusion of Queensland in 2000 and Tasmania in 2005.
  • The progression of remotely-read interval meters to millions of small customers.
  • Removal of the regional boundary reset rule and snowy region in 2009.
  • Introduction of global, five-minute settlement from 2021.

The last two years have seen commentators and politicians direct a mountain of scorn at the NEM. In reality, these criticisms are almost entirely about factors unrelated to the market design – lack of environmental policy cohesion being an example. In fact, the NEM’s founders created a remarkably robust underlying design, which, having the same name, is conflated with negative aspects of the industry more broadly.

Contemporary politicians and commentators often say the market should have a “plan”, oblivious to the self-contradiction. History reveals why plans are dangerous things.

Today we take for granted the concepts of generator and retail competition, open access and inter-state trade, but we often forget they were only possible through remarkable efforts during the 1990’s. These efforts created the NEM out of an industry that was once entirely the opposite of these things. They make today’s transformation possible with new technologies and innovations at the up and downstream ends of the industry at a rate that could not happen in the pre-NEM days. No-one would describe today’s NEM as “Slow, Easy, Comfortable”!

For more, Ben Skinner further discusses the 20th anniversary of the NEM in our Energy Pulse podcast: Listen here.


[ii] Victorian Office of Regulator General “Extended Report on reliability” (1997) and Australian Energy Regulator Network Performance statistics



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