supagridThe National Electricity Market is not a single, uniform pool of electricity. It is divided into geographic regions that reflect the structure and limits of the physical transmission network.
Each region has its own balance of supply and demand, and therefore its own electricity price. Understanding how regions interact is critical to understanding price behaviour in the NEM.
NEM Regions
The NEM is divided into multiple regions, each representing a large area of the transmission network. These regions are the basis for wholesale pricing.
Each region:
- Has its own regional reference price
- Contains a mix of generators and demand
- Is treated as a single pricing area by the market
While electricity flows continuously across the grid, prices are calculated at the regional level, not at individual locations.
The regional price is not the same as the price at every physical location within the region.
Why Regions Exist
Regions exist because the transmission network has physical limits. Electricity cannot always flow freely across long distances or between all parts of the grid.
Dividing the NEM into regions allows the market to:
- Reflect major transmission bottlenecks
- Manage system security more effectively
- Produce prices that better represent local conditions
Without regions, the market would assume electricity can move anywhere instantly, which is not physically possible.
Interconnectors
Interconnectors are transmission links that allow electricity to flow between regions. They play a critical role in sharing generation resources and balancing supply and demand across the NEM.
Interconnectors enable electricity to flow between regions, have physical flow limits in each direction, and are affected by losses and network conditions. Electricity tends to flow from lower-priced regions to higher-priced regions, but only when network capacity allows.
For nominal capacities, technical detail, and AEMO variable definitions for each interconnector (Terranora, QNI, Basslink, Heywood, Murraylink, VIC1-NSW1), see the dedicated Interconnectors page.
Interconnector Constraints
Interconnectors are frequently constrained due to:
- Thermal limits on transmission lines
- Voltage and stability requirements
- Planned outages or maintenance
- System security constraints
When an interconnector reaches its limit, additional electricity cannot flow across it, even if prices differ between regions.
Price differences between regions often indicate a constrained interconnector.
Regional Price Separation
When interconnectors are unconstrained, regions tend to have similar prices. When constraints bind, regions can experience very different prices at the same time.
Price separation occurs when:
- A region cannot import enough low-cost electricity
- Local generators must be dispatched instead
- Higher-cost bids set the regional price
This is a common driver of price volatility and regional divergence in the NEM.
Nodes and Physical Location
While prices are set at the regional level, generators and loads connect to the grid at specific physical locations, known as nodes.
Node-level conditions influence:
- How much electricity can be exported or imported
- Whether a generator can be fully dispatched
- How constraints affect individual assets
This means two generators in the same region can face very different operating conditions, even though they receive the same regional price.
Regional prices hide significant local network effects.
Why This Matters
Regions and interconnectors explain many outcomes that otherwise appear counterintuitive.
They help explain:
- Why prices spike in one region but not another
- Why cheap generators are sometimes constrained
- Why congestion increases volatility
- Why network investment can change market behaviour
Understanding regions is essential before analysing dispatch, pricing, or constraints in detail.
What to Take Away
A few key ideas underpin regional behaviour in the NEM:
- The NEM is divided into pricing regions
- Interconnectors link regions but have limits
- Constraints drive regional price differences
- Physical location still matters within a region
This framework sets the stage for understanding generators, units, and how they participate in the market.
Continue with Generators & Units to learn how facilities and units are identified and dispatched.