What is the National Electricity Market?

Put simply, the NEM is a physical power system and electricity market that connects New South Wales, the Australian Capital Territory (through NSW), Queensland, South Australia, Victoria and Tasmania. It is one of the world’s longest interconnected power systems, spanning more than 5,000 km from Port Douglas in Queensland to Port Lincoln in South Australia, and is currently managed by the Australian Energy Market Operator (AEMO) with the stated objective of providing all Australians with access to reliable, secure, and affordable energy.

Unfortunately, the NEM is anything but simple. The origins, functions, dynamics, and plans that make the NEM what it is are inseperable from political, technical and financial realities, and often the NEM's design balances several, frequently shifting, priorities. Below is an overview which covers a a few key areas so those interested in the NEM can begin learning more. 

History

The NEM officially launched in 1998 amidst a broader wave of state and federal government reforms aimed at increasing competition, primarily via the liberalisation of markets. 

Historically states and territories' energy sectors had been dominated by large, vertically integrated utilities who were responsible for the generation, transmission, distribution and retailing of electricity. However, in 1991 the Council of Australia Governments established the National Grid Management Council to deliver on the recommendations of a report by the Industry Commission. Following guidance from this Council, federal, state and territory governments initiated several reforms of their energy sectors that would help facilitate their entry into a nationwide wholesale market. Broadly, these reforms included disaggregating their vertically integrated utilities, privatising or corporatising the resulting disaggregated entities so they would operate on commercial principles, trialling electricity markets, and developing new state and national institutions. There was strong bipartisan support for these reforms at all levels of governments. 

A staged transition that saw states slowly integrate systems resulted in the launch of the NEM in 1998. This transition saw New South Wales join the Victorian market in 1997, followed soon after by South Australia. Queensland participated through a separate market until the completion of interconnector projects, such as Directlink in 2000 and the New South Wales Interconnector in 2001, facilitated its full integration. Additional projects, including Murraylink (VIC–SA) in 2002, further strengthened network reliability and electricity trading between states. A major milestone occurred when Tasmania joined the NEM in 2005, with the Basslink interconnector joining the state to the Victorian grid.

Supply and demand across the NEM

As one of the world’s longest interconnected power systems, supply and demand in the NEM is complicated and multi-faceted. Federal and state policies, regional industries, transmission interconnectors and the variety of energy sources all influence the specifics of power generation and consumption. Although the NEM technically operates as five interconnected regional markets, each with their own generators and users as well as slightly different pricing dynamics, it is still reasonable to make statements about the NEM as a whole. 

In the twelve months preceding November 2025, approximately ~190,100 GWh of electricity was consumed within the NEM. More than 100 generators spread across the NEM contributed to this supply by utilising a diverse mix of fuels. Measured across the year previous full year, the fuel mix was:

Thhe level of electricity consumption across the states broadly correlates with population and industrial activity: 67,600 GWh in New South Wales (36%), 56,300 GWh in Queensland (30%), 44,000 GWh in Victoria (23%), 11,800 GWh in South Australia (6%), and 10,400 GWh in Tasmania (5%). The majority of this demand, roughly 139,000 GWh, comes from either small and medium businesses or large industrial users, with the remaining primarily coming from residential consumers. This demand is expected to rise to approximately 300,000 GWh in 2050, with population growth as well as residential and business electrification trends expected to contribute significantly to this.

A novel influence on the supply and demand dynamics of the NEM in Australia is rooftop solar, which currently provides roughly 13% of the nation’s electricity generation. However, rooftop solar is an off-grid factor in that it reduces household reliance on the grid, essentially reducing the overall level of consumption in the NEM, rather than a contributor to energy supply in the NEM. 

The 'M' in NEM

A key element of the NEM is its wholesale trading and financial settlement systems, which reconcile market transactions and facilitate the smooth provision of electricity from generators to retailers. 

The NEM wholesale market operates according to a five minute dispatch interval, for which electricity generators submit offers to supply electricity in different price bands. Electricity is primarily purchased by retailers, who supply households and businesses, as well as by some large industrial users that participate directly in the market. Some large consumers also bid to reduce consumption (demand response) as an alternative to generation. Bidirectional units, such as batteries and pumped hydro, can submit bids both to consume electricity and to generate it.

The NEM Dispatch Engine (NEMDE) determines the combination of generation and demand response required to meet demand in each five minute interval (based on forecasts of total electricity demand by AEMO). It considers generator bids, demand, and transmission constraints across the five interconnected NEM regions. NEMDE dispatches the lowest-priced offers first and progressively selects higher-priced offers until sufficient supply is secured. However, the highest-priced offer required to meet demand sets the regional price for that five minute interval, which is then paid to all dispatched generators regardless of their individual bids, thererfore incentivising low-cost generators to bid (Figure 1 illustrates this dynamic). Prices are bound by a Market Price Cap and Market Price Floor, which are indexed annually. In 2024–25, the price floor was –$1,000/MWh and the price cap was $17,500/MWh.

Australian Energy Market Operator (AEMO)

AEMO was established by the Council of Australian Governments in 2009 as an amalgamation of six state and interstate energy services. In addition to managing the NEM, AEMO also manages Western Australia’s Wholesale Electricity Market (WEM) and gas markets, such as Victoria’s Declared Wholesale Gas Market and the Short Term Trading Markets in several states.

The role and responsibilities of AEMO have evolved over time, but as of 2026 officially include:

Maintaining secure electricity and gas systems
AEMO aims to ensure reliable and efficient energy supply for all users by operating the NEM, WEM, and various gas markets. It monitors, forecasts, and manages system performance, plans for future needs, and coordinates emergency responses to maintain stability and restore operations during energy disruptions.

Managing electricity and gas markets
AEMO manages energy supply and demand in real time to ensure energy efficiently and enable competition among participants. This involves overseeing market registration, dispatch, financial settlement, and data systems while providing analysis and insights to enhance transparency, efficiency, and decision-making.

Lead the design of Australia’s future energy system
AEMO provides independent planning, forecasting, and modelling to guide investment and regulatory decisions. It draws on collaboration, consultation collaboration, and trials to develop new standards and frameworks for the NEM, WEM, and gas markets.

AEMO works alongside numerous other regulatory bodies, such as the Australian Energy Market Commission (AEMC) and Australian Energy Regulator (AER).