From marginal value to price

The rule everything follows from

A region's price is the cost of supplying the next megawatt of demand at its reference node. Once a constraint binds, that next megawatt must be supplied without pushing any binding constraint past its limit. Everything in this chapter is that sentence applied to different shapes of constraint.

Two regions, one full line

    VIC: price $30                                  NSW: price $80
 +-------------------+      +-----------+      +-------------------------+
 | Cheap generation  | ---> | The line  | ---> | Local generation        |
 | $30/MWh, spare    |      |  500/500  |      | $80/MWh sets the price  |
 +-------------------+      |   FULL    |      +-------------------------+
                            +-----------+      | +1 MW of demand arrives |
                                               +-------------------------+

1. Ask the price question in Victoria: the next megawatt comes from the $30 plant. VIC = $30.
2. Ask it in New South Wales: the $30 plant has spare capacity, but its path is full; the binding constraint flow <= 500 forbids using it. The only legal source is the local $80 plant. NSW = $80.
3. Ask the marginal value question: one more megawatt of limit would let $30 power displace $80 power, saving $50. MV = $50.

The punchline: $80 minus $30 equals the marginal value. The constraint did not set either price; it restricted which plant could be marginal in NSW, and the price difference is the shadow cost of the bottleneck surfacing. For a simple interconnector limit the rule of thumb is importing price is about exporting price plus MV, smudged by losses.

Constrained off, constrained on

The direction of the operator tells you who suffers. A binding <= constraint holds its LHS units below what their offers would earn: they are constrained off, and the regional price on their side tends to rise because cheaper supply has been shut out. A binding >= constraint holds units above what they would choose: constrained on, and the price tends to fall because more expensive supply is being forced in. Constrained-off generators receive no compensation in the NEM; they simply earn the regional price on the megawatts they are allowed to produce.

Which region prices high

For an interconnector the sign convention is the whole story. Each interconnector has a nominal positive direction from a REGIONFROM to a REGIONTO; VIC1-NSW1 runs from Victoria to New South Wales, so a positive flow is Victorian export. The export limit bounds the positive direction, the import limit bounds the reverse. When a limit binds:

• Export limit binding: the FROM region cannot push any more into the TO region, so the TO region (the importer) is short of cheap imports and prices high; the FROM region has trapped surplus and prices low.
• Import limit binding: the FROM region cannot pull any more from the TO region, so the FROM region prices high.

A named export limit points high at REGIONTO; a named import limit points high at REGIONFROM. Chapter 1's snapshot showed VIC1-NSW1 at its import limit, flow negative (NSW into Victoria), and Victoria priced eight times higher than NSW. Now we can see the constraint that did it.

A real evening: 8 July 2026

N^^V_DTSS_1 is a voltage-stability constraint: . It applies while the Dapto to Sydney South line is out of service, and that evening it was. Its LHS carries the VIC1-NSW1 interconnector with factor and a list of southern NSW generators with negative factors, so the constraint caps how much can flow south into Victoria.

Generators on the LHS: the blend

When the binding constraint contains generators with factors, the next megawatt must come from a blend whose net effect keeps the LHS exactly at its limit. From AEMO's training material: G1 offers $12, G2 offers $10, and the binding constraint holds only if 5 x dG2 = 2 x dG1. Serving one more megawatt (dG1 + dG2 = 1) forces dG1 = 0.714 and dG2 = 0.286:

Flip a factor's sign and one generator must move backwards while the other overshoots, which is how binding constraints occasionally produce prices above every offer in the region, or below zero. NEMDE publishes exactly which offer bands set each price and with what weight: the price-setter file. Each contributing band gets a row with an INCREASE, the megawatts it moves per megawatt of reference-node demand, negative for units that move backwards, and the regional price is the increase-weighted sum of the bands' prices.

The local price: what a unit actually faces

Per generator, a constraint's effect on the price at its own connection point is MV x its LHS factor. Summed over every constraint touching the unit, that is the local price adjustment AEMO publishes per DUID in DISPATCH_LOCAL_PRICE. Add it to the regional price and you get the effective marginal price at the unit's terminals; a large positive adjustment is the signature of being constrained off (a negative marginal value times a negative factor).