The National Electricity Market (NEM) plays a critical role in balancing supply and demand for electricity across Australia. One key factor influencing this balance is the Marginal Loss Factor (MLF), which the Australian Energy Market Operator (AEMO) publishes by 1 April each year.1 AEMO estimates that approximately 10% of electricity transported between generators and consumers is lost each year due to electrical resistance and the heating of conductors.2
MLFs significantly impact the efficiency of power transmission, and have knock-on effects for electricity pricing and investment decisions. Understanding how MLFs are calculated and their broader implications can help stakeholders – from generators and investors to consumers – navigate the complexities of the electricity market.
What are MLFs?
MLFs measure the amount of electricity ‘lost’ as it travels through the transmission network from generators to consumers.3 Electricity is lost during transmission primarily because it is converted into heat energy due to resistance in the transmission lines.4
The distance between the generator and the consumer, the quality of the transmission line (including resistance and voltage), and the amount of power transmitted all contribute to these heat losses.5 Each of these factors affects the resistance of the transmission lines and the current flowing through them, which in turn influences how much electrical energy is lost as heat.6
How are MLFs calculated?
AEMO calculates MLFs using a detailed network model. This process includes forecast generation and load data, network constraints, and historical operating conditions.7 The resulting MLFs reflect the efficiency of a generator’s location relative to a Regional Reference Node (RRR) (the pricing and loss calculation reference point).8
An MLF of 1.0 means there are no marginal losses (so, 1 MWh generated results in 1 MWh credited to the market). By comparison, an MLF below 1.0 indicates transmission losses (so, 1 MWh generated results in an amount less than 1MWh credited to the market). The further a generator is below an MLF of 1.0, the more electricity is lost during transmission.9
Why do MLFs matter?
Because electricity lost during transmission reduces the amount of energy which reaches the market, MLFs have a significant impact on generators, investors and consumers.
How MLFs impact generators
In regions where transmission losses are high, generators typically receive lower revenue for the electricity they produce.10 This is because when generators submit bids into the market, their MLF is factored into the dispatch and settlement process.11 For example, if a generator bids $1/MWh but has an MLF of 0.5, it means only half of the generated energy is expected to reach the RRN due to losses. To deliver 1 MWh, 2 MWh must be generated. As a result, the market treats the effective cost of delivery as $2/MWh, reflecting the true cost of usable energy. Accordingly, generators with low MLFs may be less profitable than equivalent generators (by size and generator type) with a higher MLF.
How MLFs impact investors
MLFs have a direct influence on revenue and therefore play a critical role in shaping energy investment decisions for renewable developers.12 Because lower MLFs reduce the effective income for each megawatt-hour generated, sites with poor MLFs – even if rich in wind or solar resources – can be financially unattractive.
Developers and investors are therefore incentivised to locate projects closer to RRNs or in areas with robust transmission infrastructure, where MLFs are higher and more stable. Furthermore, the year-to-year volatility of MLFs introduces uncertainty in long-term financial modelling. To mitigate this, developers and investors often engage consultants and grid operators early to forecast MLF trends, model various scenarios, and inform site selection and system design. Even small MLF declines over time can significantly impact profitability across a project’s life span.
How MLFs impact consumers
Areas with consistently high MLFs (close to 1.0 or above) tend to attract more generation investment due to better returns, leading to more competitive and resilient energy markets.
By contrast, regions with low MLFs can face reduced generator investment due to the lower financial returns associated with transmission losses. This can lead to limited local competition, 13reduced supply diversity, and greater reliance on distant generation sources. Over time, this may contribute to higher prices and reduced reliability for local consumers.
Although the current market design aims to reflect real network costs and encourage efficient siting of renewable energy projects, in practice, it can reinforce regional disparities – particularly if remote areas are persistently disadvantaged by low MLFs. Without targeted infrastructure upgrades or policy interventions, these communities may see slower adoption of renewables and miss out on the economic benefits of local energy development.
How can BESS integration help low MLF generators?
Battery storage systems are emerging as a key solution for energy projects facing the challenges of low Marginal Loss Factors (MLFs).
By co-locating battery storage with generating facilities – particularly in areas with less favourable MLFs – energy can be stored locally and discharged at times when demand is higher or when transmission conditions are more efficient. By tailoring discharge to the conditions of the market, generators can limit losses and hence increase the value of the energy delivered.14 Further, in areas with low MLFs, there’s often congestion on the grid, which can lead to renewable generators being curtailed (i.e., asked to reduce output).15 A BESS can store excess generation during these times, reducing the impact of curtailment and improving asset utilisation.
In addition to addressing transmission loss issues, batteries offer broader benefits. They help stabilise the grid by managing fluctuations in renewable energy output, supporting frequency control, and providing backup during periods of high demand or low generation.16 These additional services can provide generators with additional revenue streams, and make the grid more flexible and reliable. We discuss more on the benefits of BESS systems in our article, ‘Plugging in: how BESS integration is shaping contract models for renewable projects’.
Ultimately, battery storage can improve the economic viability of projects in low-MLF areas. By reducing the need to over-generate and making better use of available infrastructure, batteries make these projects more attractive to investors and contribute to a more efficient energy system overall.
MLFs: Low energy creates high stakes
In a market where efficiency and cost are paramount, MLFs are essential for optimising electricity transmission. While poor MLFs can challenge profitability and deter investment, especially in renewable energy projects, solutions like Battery Energy Storage Systems (BESS) offer promising ways to mitigate transmission losses and improve grid efficiency. As the renewable energy market continues to evolve, understanding MLFs and how to manage them will remain crucial for a more reliable and economically viable energy system, benefiting generators, investors and consumers.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.
1National Electricity Rules Version 227 as amended 27 March 2025 (Cth) (‘NER’) cl 2A.1.3.
2AEMO, Loss factors and regional boundaries (Web Page, Undated) <https://aemo.com.au/energy-systems/electricity/national-electricity-market-nem/market-operations/loss-factors-and-regional-boundaries>.
3AEMO, Marginal Loss Factors: Financial Year 2024-5: A report for the National Electricity Market (Report, May 2025) (‘AEMO MLF 2024-25’) 71.
4Powerlink Queensland, Marginal Loss Factors and Network Congestion in Queensland (Fact Sheet, October 2024) (‘Powerlink Fact Sheet’) 2.
5AEMC, Transmission loss factors (Web Page, Undated) <https://www.aemc.gov.au/energy-system/electricity/electricity-system/transmission-loss-factors>.
6Ibid.
7AEMO, Forward-looking Transmission Loss Factors (Report, 12 December 2024) 8.
8National Electricity Rules Version 227 as amended 27 March 2025 (Cth) (‘NER’) cl 3.6.2.
9AEMC, Fact Sheet – Marginal loss factors (Media, 1 March 2019) (‘AEMC Fact Sheet’) 1.
10Ibid 2.
11Dan Lee, Marginal loss factors: why they matter, and where they bite (Article, 4 July 2022) <https://reneweconomy.com.au/marginal-loss-factors-why-they-matter-and-where-they-bite/#:~:text=Losses%20in%20the%20NEM%20(The%20Long%20Version)&text=Consistent%20with%20the%20marginal%2Dcost,Regional%20Reference%20Node%20(RRN).>.
12AEMC Fact Sheet (n 9) 1.
13Ibid.
14Morteza Shafiekhani and Meysam Qadrdan, ‘Addressing electricity transmission network congestions using battery energy storage systems – a case study of great Britain’ (2025) 384 Applied Energy (‘Addressing electricity transmission network congestions’) 3.
15Powerlink Fact Sheet (n 4) 4.
16Addressing electricity transmission network congestions’ (n 15) 3.
