How spot prices work
The electricity market uses spot electricity prices for each trading period to schedule available generation so that the lowest-cost generation is dispatched first.
Spot electricity prices fall into four categories:
All these prices are available to industry participants on the wholesale information and trading system – we call this WITS for short.
A trading period is a half hour interval that is used in the spot pricing and reconciliation processes.
WITS presents forecast prices that have been calculated using the scheduling, pricing and dispatch model. This model takes into account:
- the expected state of the electricity system
- generator offers
- purchaser bids (or in some cases a forecast of demand)
- dispatchable demand offers
Forecast prices give industry participants valuable information on when and how best to use electricity.
Forecast prices are calculated every two hours for every node (grid injection or grid exit point) across New Zealand for each half hour trading period, up to 36 hours ahead of time.
Generators make offers to supply electricity at 52 grid injection points (where their power stations connect to the national grid), and retailers and major industrial users made bids to buy electricity at 196 grid exit points (typically where the national grid connects to a local network).
Five-minute indicative prices, often called “real-time prices”, are calculated at the end of each five-minute period for every node. They take into account the conditions of the power system at the beginning of the relevant five-minute period.
These prices are calculated after electricity has been generated and consumed.
Provisional prices may be missing metering information, for instance actual meter readings, but they are the best estimate of what the prices are at the time these prices are published.
Interim prices are published by the pricing manager the day after the generated electricity is consumed, once the data is complete.
The publishing of interim pricing enables industry participants to identify if there have been any errors or issues, before final prices are published. Participants can claim a pricing error, which will delay the publication of final prices until the error is considered and addressed (if necessary).
Scarcity pricing, a mechanism which puts a price floor and price cap on spot prices during electricity supply emergencies, is based on interim prices.
Final prices are calculated by the pricing manager and sent to the clearing manager who uses them to calculate invoices for the settlement of trades between the sellers (for example generators) and buyers of electricity (for example retailers and major industrial consumers). The invoices are sent via WITS.
Final prices affect the purchasers who choose to purchase electricity without managing spot price risk through the hedge market.
Pricing trends can be seen in the monthly WITS reports.
High spring washer pricing situation
A high spring washer is a rare pricing phenomenon where high spot prices occur unexpectedly.
The pricing manager determines whether a high spring washer pricing situation has occurred and may apply a relaxation to the transmission constraint to resolve the situation.