Principles of a market-based electricity industry and possible steps toward implementation in Australia

The recent New Zealand Wholesale Electricity Market study identified a converging international trend towards a "facilitated market" electricity industry model which would combine nodal spot and forward markets for electricity with government guidance on long term policy issues. However the principles of a market-based electricity industry are not well understood. This paper reviews those principles, considering technical issues such as quality of supply pricing, inter-temporal issues such as the operation of storages under uncertainty and spatial issues such as nodal pricing. A key result is that the network should be seen as allowing arbitrage between nodal markets rather than as providing a separately priced transmission service. Transition from a traditional industry structure is discussed in the Australian context.