Australia's national electricity market has been suspended for the first time. How did it come to this?

The national energy market has been fully suspended for the first time since its inception 24 years ago amid an energy crisis that's gripping Australia's east coast.

Source: SBS News

For the first time ever, Australia's national electricity market has been suspended, with the market operator saying it has become "impossible" to operate within the rules.

The Australian Energy Market Operator (AEMO) said in a note issued on Wednesday it had suspended the electricity spot market in NSW, Queensland, South Australia, Tasmania, and Victoria, until further notice.

It came after the eastern states were warned of potential power outages earlier this week.

"The situation in recent days has posed challenges to the entire energy industry, and suspending the market would simplify operations during the significant outages across the energy supply chain," AEMO chief executive Daniel Westerman said.

It is the first full suspension in the history of the national energy market, which began in 1998, and means the operator will take control of directing supplies from energy generators to the east coast power grid.

The operator will also set energy prices for every jurisdiction in the market.

Among the main causes of the crisis include coal plant failure due to disrepair, soaring global gas prices, and rising energy use due to a cold snap in New South Wales and Victoria.

Another factor is energy generators - which usually provide backup supply when output capacity is low - pulling out of the market after AEMO imposed a $300/megawatt-hour cap on market prices.

"This is the fault of the government, on both sides, for refusing to implement a domestic reservation policy," energy law professor at Deakin University, Samantha Hepburn, told SBS News.

"It's totally ridiculous that we don't have a protection mechanism for the domestic market that reserves a certain portion so that we don't have to buy it back at 80 times the price and so that retailers can realistically purchase and make a profit out of the business they are running."

What caused the crisis?

Associate Professor of economics at Monash University, Guillaume Roger, said the crisis is not due to a shortage in supply but a shortfall of capacity to generate enough energy to feed demand.

"Right now, we're in the midst of a crisis where the market has essentially broken down," he told SBS News.

"There is no shortage of supply, it's just that we are missing about two or three gigawatts of coal power capacity, which is normally available to us.

"The estimate is about 20 to 25 per cent of the coal fleet actually not working."

When there is a supply issue like this, the market relies on generators to put energy back into the market to meet demand.

On Monday, AEMO imposed a $300/megawatt-hour cap for the wholesale power market for Queensland, South Australia, Victoria and New South Wales.

"We don't see $300 per megawatt very often, the average price is about $70, and the price cap in the market is $15,000," Associate Professor Roger said.

"But we have generators that produce at $400, so they need to be paid $400 to produce. If you give them $300, they prefer not to."

If generators refuse to buy in, AEMO can order them to put the energy back in under the mechanism. They can then seek compensation for the additional cost.

What does a market freeze do?

Professor Hepburn said freezing the market means AEMO is trying to work out whether it continues to impose price caps.

"The aim of the freeze is to try and work out how to implement the National Electricity Rules in a manner which will make sense," she said.

"There is also going to have to be, in my opinion, robust implementation of emergency rules regarding reservation and supply."

Mr Westerman said AEMO's suspension of the market is temporary and will be reviewed daily.

He said it will be lifted when AEMO is confident the market will operate properly.

Should you be concerned?

Associate Professor Roger said because most Australians have energy contracts with a fixed rate tariff, the impact will be minimal for most consumers.

"They'll barely notice, you know, except if we do see a blackout, of course. If you see a blackout it's a disaster for anyone affected," he said.

Professor of economics at the University of Melbourne, David Byrne, said while the increase in wholesale electricity prices won't impact consumers in the short term, they will notice a difference over time.

"Anything you buy that involves manufacturing and production, all of that takes electricity to produce and we never really think of it," he said.

"It just sits in the background, and we don't think of this as something that affects us in terms of keeping our lights on or in terms of the costs of all the things we buy and consume. But you'll see that pass through to consumers over time."

- With AAP.