Operating the wholesale electricity market

In New Zealand’s electricity market, the System Operator forecasts electricity demand across the country in 30-minute trading periods throughout the day. 

Electricity generators such as hydro dams and wind farms then offer electricity to meet that demand, plus reserve generation or “backup” power. These reserves help us keep the system stable if something goes wrong, such as a sudden fault to a major generator. 

Offers from generators are ranked from the lowest priced “spot” offer to the highest and placed in a stack. We then select offers from the cheapest to the most expensive in each trading period until we have enough electricity to power the country and provide for reserve generation. 

All offers that are selected from the stack then get paid the same amount as the highest offer selected. This is called the spot price for the trading period.

We always select the lowest combination of offers from generators to most efficiently meet demand. If cheaper renewable energy from hydro schemes and wind farms meets the bulk of demand then spot prices will be lower, but if more expensive thermal generation like coal and gas is needed then all generators will receive higher spot prices and the total cost to the system will be higher. 

Electricity consumers don’t tend to notice these real-time price fluctuations because they buy their electricity from retailers on fixed contracts. Other major buyers of electricity may take out hedge contracts to smooth out volatility in spot prices.