Comparison of the WEM and the NEM

The Wholesale Electricity Market (WEM), which serves over 1.1 million customers in the south west of Western Australia, is both physically and structurally separate from the National Electricity Market (NEM), which supplies roughly 9 million customers across the eastern states of Australia (New South Wales, Queensland, South Australia, Tasmania and Victoria).

The table below summarises the main features of both electricity markets:

WEMNEM
Installed capacity
(as at August 2022)
6.2 GW53.5 GW
Peak demand4.3 GW (2016)35.9 GW (2009)
Real-time energy marketGross pool dispatch
Net pool settlement
Gross pool
Trading / dispatch interval30 min (trading)
10 min (dispatch)
5 min (trading and dispatch)
Locational pricing1 regional reference node5 regional reference nodes (one node per state)
Real-time market dispatchUnconstrained (except for new facilities under the Generator Interim Access arrangements).
However, the new market starting in October 2023 will be security constrained.
Security constrained
Market price cap$290/MWh for non-liquid fuels
$1,057/MWh for liquid fuels
(as at August 2022)
$15,500/MWh (as at August 2022)
Cumulative price thresholdNone$1,398,100 over a rolling 7-day window (as at August 2022)
Market ancillary servicesLoad Following Ancillary Service (LFAS) – equivalent to FCAS regulation servicesFrequency Control Ancillary Service (FCAS):
Regulation Raise/Lower
Contingency Fast Raise/Lower (6 sec)
Contingency Slow Raise/Lower (60 sec)
Contingency Delayed Raise/Lower (5 min)
Non-market ancillary servicesSpinning Reserve Ancillary Service (SRAS) – equivalent to FCAS contingency services
System Restart Service (SRS)
Dispatch Support Service (DSS)
System Restart Ancillary Service (SRAS)
Network Support Ancillary Service (NSCAS)
Day ahead marketYes – Short-Term Energy Market (STEM)No
Capacity marketYes – Reserve Capacity Mechanism (RCM)No (but currently being contemplated)
Derivative marketsOTC/bilateral markets
STEM
ASX exchange traded derivatives (does not require physical settlement)
OTC/bilateral markets
InterconnectorsNoYes – between regions
System and market operatorAustralian Energy Market Operator (AEMO)Australian Energy Market Operator (AEMO)
Market regulatorEconomic Regulation Authority (ERA)Australian Energy Regulator (AER)
Market rulemakerCoordinator of Energy / Energy Policy WA (EPWA)Australian Energy Market Commission (AEMC)

Key differences

Capacity mechanism

There are many subtle differences between the WEM and the NEM, but the headline difference in market design is the existence of a capacity mechanism in the WEM – the Reserve Capacity Mechanism (RCM) – and the flow-on impacts that this has on other parameters, e.g. the lower market price cap in the WEM that does not allow for scarcity pricing. The WEM capacity mechanism has long been justified based on the distinct “peakiness” of the system demand, where peaking generating plant are only needed a very small proportion of the time. If the WEM were an energy-only market, then it would require a very high market price cap to guarantee revenue sufficiency for peaking generating plant.

The load duration curves below for the WEM compared with other Asian energy-only markets (including the NEM) show the extent of the peakiness in the WEM demand:

Source: Lantau Group

However, peakiness is not the only justification for a capacity mechanism – it is also argued that weather-based volatility and long periods of wind and solar droughts (e.g. Dunkelflaute effects) will drive the need for capacity mechanisms in systems dominated by variable renewable energy. The NEM is currently contemplating the introduction of a capacity mechanism, with the Energy Security Board publishing a consultation paper in June 2022 on high-level design options.

Contract markets

Another key difference between the WEM and the NEM is the lack of well-developed contract markets in the WEM. Where the NEM has well-established and transparent forward pricing mechanisms (e.g. ASX exchange-traded electricity futures), contracting mechanisms in the WEM are much more opaque, with the bulk of energy traded bilaterally.

However, the WEM does have a day-ahead market (STEM) that allows for some level of hedging for uncontracted energy. Though rather than being a deliberate design feature of the WEM, the STEM is largely just a holdover from the original market design before the real-time balancing market commenced in 2012, i.e. the WEM was purely a day-ahead market from market start in 2006 to 2012.

Fuel supply markets

A final key difference relates to the characteristics of the fuel supply markets in the WEM and the NEM. In Western Australia, there is a domestic reservation policy where natural gas producers must reserve the equivalent of 15% of their production for domestic use. Thermal coal that has been mined in the Collie basin for nearly a century is also only used domestically, with plans for a thermal coal export industry never materialising (presumably on commercial grounds). This means that natural gas and coal prices in WA are more insulated from international prices, thus leading to relatively stable fuel prices. In contrast, the NEM is highly exposed to international coal and gas prices owing to the large LNG and coal export industries on the east coast and the relative lack of protection for domestic users.

The winter energy crisis of 2022 perfectly demonstrates the differences in the fuel supply markets, with the WEM exhibiting relatively stable spot prices while the NEM saw skyrocketing spot prices that reached all-time highs and ultimately led to a market suspension.