AUSTRALIA Law and Practice Contributed by: Alexander Danne, Roy Groom, Rohit Venkat and Georgia Summerhill, Clayton Utz
While the NEM does not presently operate a separate capacity market, at present, generators are paid for energy they produce and deliver to the wholesale mar- ket as opposed to being paid to have capacity avail- able. Reforms are underway to introduce a capacity mechanism designed to provide investment signals for dispatchable and firming generation as the system transitions from coal. Financial risk management occurs via bilateral con- tracting between generators and retailers outside the spot market. Common instruments include power pur- chase agreements, swap contracts, cap contracts and futures traded on the ASX Energy exchange. These hedge contracts underpin revenue certainty for inves- tors and price stability for retailers. Western Australia’s WEM operates under a funda- mentally different design. It comprises a real-time balancing market for energy dispatch, coupled with a Reserve Capacity Mechanism that procures suffi- cient firm capacity two years ahead of each capacity year to meet forecast peak demand. This dual struc- ture ensures both short-term operational balance and longer-term supply adequacy within the isolated South West Interconnected System. Data centres represent one of the fastest-growing sources of electricity demand in both the NEM and WEM, with consumption forecast to grow approxi- mately 25% annually over coming years. Some oper- ators are pursuing direct grid connections at trans- mission voltage, while others seek behind-the-metre solutions or long-term PPAs to secure firm renewable supply. The AEMO and governments are actively con- sidering how to plan for these step-change demand increases, including through updated forecasting methodologies and new technical connection stand- ards. 2.2 Electricity Imports and Exports Being an island continent, Australia has no interna- tional electricity interconnections. Western Australia’s SWIS and the Northern Territory grid operate in isola- tion, with no interconnection to the NEM or to each other. Electricity transfers occur exclusively between the five NEM regions via a network of regulated and merchant transmission interconnectors. These inter-
regional flows are not subject to separate import or export approvals; rather, they occur automatically through the central dispatch process, driven by price differentials between regions. The principal existing interconnectors are: • QLD – NSW : Queensland–New South Wales Interconnector (QNI), QNI Minor and Terranora (Directlink); • NSW – VIC : Victoria–New South Wales Interconnec- tor (VNI) and VNI Minor; • VIC – SA : Heywood Interconnector and Murraylink; and • VIC – TAS : Basslink (a merchant undersea cable). Electricity flows from lower-priced regions toward higher-priced regions as determined by the AEMO’s dispatch engine, subject to the thermal and stability limits of each interconnector. Where price separation occurs between regions, inter-regional settlement residues accrue and are distributed to market partici- pants via auction processes. Several major interconnector projects are progressing to increase transfer capacity across the NEM. These include Project EnergyConnect (connecting NSW and SA, which is as of June 2026 being fully energised), HumeLink (reinforcing transmission in southern NSW with a scheduled completion date of late 2027), VNI West (an additional VIC–NSW link which is in forced land access and environmental assessment phase) and Marinus Link (a second undersea cable between Victoria and Tasmania which is under construction). New interconnectors must satisfy the Regulatory Investment Test for Transmission (RIT-T) administered by the AER, be identified as actionable in the AEMO’s ISP, and obtain state planning and environmental approvals. 2.3 Supply Mix of Electricity Australia’s electricity supply mix is undergoing a rap- id transformation. A decade ago, coal-fired genera- tion accounted for approximately 75% of NEM out- put. As at 2025, coal’s share (both black and brown) has declined materially in total NEM generation, but remains by far the largest generator in the generation mix.
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