Wholesale Electricity Price Index

The WEPI™ provides a simple, easily reportable index that reflects daily changes to contract and spot market conditions and their effect on the stability of the underlying wholesale price for electricity in the NEM.

NATIONAL ELECTRICITY MARKET (NEM)

The National Electricity Market (NEM) has been in operation since December 1998. Since the inception of the NEM, the wholesale price for electricity and the extent to which the observed variability in the spot prices for each region will translate into higher retail prices for consumers have been clouded by uncertainty.

The complex relationship between the physical and financial markets in electricity is at the core of such uncertainty. This is characterised by the gross pool nature of the Australian market and a separate, sophisticated financial market.

Generators typically dispatch electricity depending on the merit order of their price bids to this spot or physical dispatch market. The majority of electricity is then traded under financial contracts. These financial contracts can vary substantially depending on market conditions, time of day, the number of generators and retailers involved and whether they are for base, off-peak or peak load supplies.

This approach indicates that the spot price is not the underlying wholesale price for electricity in the NEM. However, as the NEM spot price is the only publicly available price for electricity, there is a tendency to use this price to report wholesale price movements and to draw (incorrect) assumptions about associated changes to retail prices for electricity. This trend has led to increased public concern about the final delivered cost to consumers.

THE WHOLESALE ELECTRICITY PRICE INDEX™ (WEPI)™

d-cyphaTrade and the Department of Industry Tourism and Resources (ITR) recognise the value of developing suitable information and market education tools to enhance the public's understanding of the operation of the NEM. Improving the range of information available to electricity consumers and the public generally helps to allay concerns about volatile movements in the spot price for electricity.

Working in collaboration, d-cyphaTrade and ITR have spent several months developing a Wholesale Electricity Price Index™ (WEPI)™ for the Australian electricity market. The WEPI™ provides a simple, easily reportable index that reflects daily changes to contract and spot market conditions and their effect on the stability of the underlying wholesale price for electricity in the NEM.

INDEX RATIONALE

The exact relationship between spot, contract and wholesale prices for electricity is difficult for most to understand, with the exception of those who are directly involved as market participants. The spot price represents the physical price received by generators and paid by retailers and does not include the commercial terms imposed by financial contracts. The underlying wholesale price for electricity is determined primarily in the financial contract market.

The WEPI™ provides a proxy for the underlying wholesale market trends on a daily basis. It reflects changes in contract and spot prices, load conditions and the proportion of total load contracted at any one time. In addition, the WEPI is calculated for each region of the NEM.

d-cyphaTrade aims to further develop the WEPI's potential through refinements and feedback, including the possibility of making it available on a half-hourly basis to match spot price movements on electricity trading screens.

Although not designed to operate as a commercial index, improvements are expected to shift the WEPI overtime from an information guide and indicator of underlying wholesale electricity prices to a commercially tradeable index.

METHODOLOGY

The Spot price

The spot price represents the dispatch price in the physical electricity market, and is sensitive to the supply / demand balance in the physical market. It does not represent the wholesale or commercial price paid for generated electricity. Ongoing physical conditions will have a long-term impact on financial contract prices. Under certain load conditions a proportion of demand may be exposed to the spot price. Therefore the spot price does have an indirect long-term and limited short-term influence on the wholesale price of electricity.

The Future price

The financial market price for electricity is the 'agreed' future price for generated electricity. It reflects the expected spot price of electricity at a time in the future, taking into consideration an assessment of the commercial conditions (both physical and operational) in the market for a set time period into the future. The index assumes a hedging price is approximated by an average future price looking forward four quarters.

The relationship between futures cover and spot exposure

The relative cover and exposure of futures and spot markets has a number of drivers, including the supply / demand balance, pool price expectations and customer profiles. When weighted by both time and load volume the impact of this exposure can vary dramatically.

Demand

The demand, or load to be served, is not a single number. Demand can be broken into several categories and weighted according to time and volume. Different spot and contract components can be applied through this weighting.

ACCESS TO THE WEPI

The WEPI is calculated at the end of each business day and is made available on the d-cyphaTrade website overnight. To view the latest WEPI™ and/or to receive the WEPI daily in your inbox please visit the Homepage to subscribe to the WEPI™ email service.

*The WEPI™ is a Trademark of d-cyphaTrade.