Up to around the 1980s, most electricity and gas markets in Australia were based at state level, and were weakly linked. However, energy market reform began to gather force internationally in the 1980s, and was given impetus in Australia in the 1990s through the implementation of competition policy. Australian governments engaged in a major reform program, culminating in the formation of the National Electricity Market (NEM) which commenced operation on 13 December 1998. Today, the NEM supplies electricity to 7.7 million Australian customers on an interconnected national grid that runs through Queensland, New South Wales, the Australian Capital Territory, Victoria and South Australia. Approximately $8 billion of energy is traded through the NEM per year. From mid 2005, Tasmania will be connected to the National Electricity Market via BassLink.

This paper reviews the electricity market from a national perspective, and then focuses on the requirements of NSW. In particular, the NSW Government’s Green Paper Energy Directions for NSW is discussed.

The National Electricity Market Management Company (NEMMCO) provides an electricity supply – demand balance assessment on a regional basis. NSW is forecast to have a reserve deficit of 157 MW by 2008/09. The NSW Government published an Energy Directions Green Paper in December 2004 with the aim of developing an Energy Directions Statement White Paper in April 2005. The Green Paper noted that up to 6,000 MW of new supply, or demand reduction, may be needed between now and 2020. In the shorter term, new electricity supply for peak demand is likely to be required within the next few years.

The Government’s position is not to centrally determine the technology, location or timing of new investment in electrical generation. The establishment of the National Electricity Market was intended, in part, to provide price signals to investors to develop new generation capacity at the appropriate time. The Government’s preferred position is for the private sector to take the risk to finance and build / operate new generation plant – both for shorter term peak supply and longer term base load generation.

However, there are significant obstacles in the way for the private sector to take the risk to build and operate new generation plant. These include greenhouse policy risks and monetary risks – the financial returns from the wholesale electricity market do not presently seem to encourage the construction of new generation plant. How the Government responds to these issues will have considerable impact on consumer sentiment.