Spot market

The spot or wholesale market is a marketplace to buy and sell electricity. It is known as a spot market because prices are set on the spot, at a particular time and place.

About the spot market

The spot market is used to match the supply of electricity from power stations with real-time consumption by households and businesses.

We contract a range of market operation service providers to operate the electricity markets efficiently. The physical operation of the market is managed by the system operator, Transpower.

Transpower manages the electricity system so that electricity supply and demand is matched simultaneously. Electricity cannot be stored, so the electricity supplied by generators must match how much electricity is used by consumers, or blackouts can occur.

How the spot market works

The spot market is where the price of electricity is calculated. Generators that are bigger than 10 MW, or are connected to the national grid, compete in the spot market for the right to generate electricity to satisfy demand. This is subject to constraints, such as the available transmission capacity.

Each offer covers a half-hour trading period in the future and is an offer to generate a specified quantity of electricity at that time, for a nominated price. The system operator (Transpower) ranks offers in order of price and then selects the lowest-cost combination of resources to satisfy demand and ensure a reliable supply. In doing so, the system operator also considers the cost of losses across the transmission system. This means a generator with a low offer price may not be dispatched if that generator is a long way from load.

Generators make offers to supply electricity from power stations at 52 grid injection points. Retailers and major users make bids to buy electricity at 196 grid exit points.

As demand and supply change over the course of a day, spot prices are different in each trading period. Prices also vary by location, because of the costs of getting electricity from generators to consumers. Generally, prices are higher in locations that are further away from the main power stations.

The system operator uses those bids, offers, a forecast of expected demand and a model of the available transmission system to produce forecast market prices for every trading period starting from one week ahead of 'real time'. These forecast prices are updated regularly to reflect changes in offer price and quantity, refinements in the demand forecast and changes in the grid configuration.

Calculating prices

The clearing manager calculates and publishes the spot prices at which market transactions settle for each half-hour trading period. These are called final prices.

Transpower’s scheduling, pricing and dispatch software is used to compare bids and offers in the market and order them by price. Whenever the system operator dispatches generation to meet the current demand, a set of dispatch prices are calculated and published via the wholesale information and trading system. The clearing manager uses the dispatch price to calculate about 12,000 final prices every day (one price for each trading period at each node), which are then published through the wholesale information trading system.

On very rare occasions, the available generation may not be enough to meet the expected demand, this is known as a scarcity situation. In real time, the system operator will instruct demand to be reduced to meet the available generation. The value of this 'lost load' is reflected in scarcity prices. Scarcity prices are intended to provide a long-term signal for generators to invest in more generation, or consumers to invest in demand response technologies.

The clearing manager also makes sure wholesale market participants are paid for the electricity they generate, or pay the correct amount for the electricity they consume. The clearing manager does this each month by combining information provided by the reconciliation manager with the half-hourly pricing information. The clearing manager plays an important role in maintaining market confidence under the Code, and administers prudential requirements to make sure payment obligations are met.

The prudential arrangements require participants, buyers of electricity, to lodge security with the clearing manager for those purchases. They can use various methods to lodge this security, such as letters of credit from a bank, cash deposits or evidence of hedge arrangements.

Information for industry participants

The following information is for industry participants operating in the spot market.

Demand-side participants

Large consumers seeking better cost control, who are able to modify all or part of their electricity consumption at short notice, can use a dispatchable demand regime. It enables demand-side participants to compete with generators to set the spot price and be able to respond more efficiently to wholesale market conditions.

Conforming and non-conforming grid exit points

Grid exit points are the points of connection where electricity flows out of the national grid from large substations to local networks or direct to industrial consumers.

Whether or not a grid exit point is conforming or non-conforming makes a difference to bidding by wholesale buyers.

Applications and approvals

Approval is required to participate in the market as an industrial co-generating station and for participants to assume another industry participant's wholesale market obligations.

Stress tests

The stress-testing regime requires disclosing participants in the wholesale market to apply a set of standard stress tests to their market position and report the results.