What is the wholesale power spot market and how will AEMO’s decision to suspend it affect consumers?

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Days of power outages across the country have prompted Australia’s Energy Markets Operator (AEMO) to intervene in a desperate attempt to shore up the country’s electricity supply.

For the first time, AEMO has suspended the spot market for wholesale electricity nationwide.

This is the best way to “ensure a reliable power supply in a challenging time”.

But what exactly is the spot market?

Australia is working on the so-called National Electricity Market.

Here, generators (power plants) sell electricity at wholesale prices to retailers such as Origin or Ergon. Retailers then sell the purchased electricity to households and businesses.

In order for our lights to stay on, the amount of electricity sold in the market must match the amount of electricity used by homes and businesses. AEMO monitors this.

Part of the electricity is sold according to pre-established contracts.

The rest is bought and sold on the so-called spot market.

The spot price is the price of wholesale electricity at any point in time. It changes throughout the day based on demand and is typically most expensive in the afternoon and evening, when homes and businesses use electricity the most.

“Suspending the Spot Market” means that electricity is not sold at a variable spot price but at a fixed price set by AEMO.

How did it happen?

AEMO chief executive Daniel Westerman said suspending the market would simplify supply issues.(ABC News: John Gunn)

Basically due to a perfect storm in Australia’s energy sector.

Rising gas and coal prices and a series of unplanned power plant outages sent wholesale electricity prices soaring last week.

In response, AEMO set a price cap on the spot market.

Daniel Westerman speaks in front of a gray wall.
AEMO Managing Director and Managing Director Daniel Westerman. (abc news)

Because of the price cap, power generators stopped producing as much electricity because they weren’t making enough money from it.

That caused supply shortages in the energy market – and triggered the blackout alerts we saw this week.

To keep the electricity flowing, AEMO has repeatedly ordered generators to produce enough electricity

But CEO Daniel Westerman said: “It was impossible for the system to operate in the current conditions while still providing a reliable and secure power supply to Australian homes and businesses.”

What does all this mean for consumers?

Hopefully we can stop worrying about power outages.

AEMO’s plan is to put an end to the electricity roller coaster Australia was facing this week and ensure a “reliable supply of electricity… to homes and businesses”.

As long as the spot market is suspended, AEMO will set the wholesale price for electricity at a level that it deems fair to all.

It will even compensate “eligible” generators for generating electricity during this time.

“We’re creating a simple process where AEMO can really see in advance what generators will be available and when, rather than relying on last-minute intervention,” said Mr. Westerman.

So is my electricity bill going to be more expensive?

Probably. But not because the spot market was suspended.

The whole point is to make sure everyone gets a fair turn.

The price caps that went into effect on Sunday attempted to limit the spot price of electricity and thus the everyday person’s electricity bill.

Now AEMO is trying to ensure that power generators can keep running without massive losses.

But the reality is that because coal and gas are getting more expensive to buy, generating electricity is becoming more expensive.

According to the Australian Energy Market Commission, the wholesale price of electricity accounts for around 30-40 percent of a household’s electricity bill.

Increased wholesale prices are therefore passed on.

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