The Energy Link Electricity Contract Index

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The ELL index provides larger purchasers with an indication of trends in the price of fixed-price electricity contracts. The index does not include local losses or line charges, i.e. it is energy-only.

The index is calculated from data disclosed by the Electricity Commission (EC) on fixed price electricity contracts so it is based on real contracts for electricity between larger consumers and retailers, plus a smaller number of contracts between retailers.

The index is intended to provide people with responsibility for energy procurement, or a large energy budget, with a guide to movements in electricity prices over the last month, without having to access and analyse the underlying data available from the EC.

Applications

The index is useful for more than just following the market. It is a handy benchmark when renewing electricity contracts, as a guide for budgeting prior to renewing contracts, and for monitoring the performance of your electricity purchasing strategy.

Two words of caution about reliance on the ELL index and other sources of information about electricity contract prices:

1. there is a wide spread in the prices of contracts traded each month, and the unwary can end up paying more than they need to;
2. the index does not include contracts traded on the EnergyHedge platform because these contracts are traded only between the five major retailers, so are not available directly to energy purchasers, and tend to respond to market conditions differently to contracts between retailers and consumers ‚ the ELL index is based only on contracts that are not traded on Energyhedge.

How the ELL Index is Calculated

The contract data available from the EC includes:

• the time-weighted average price;
• the total volume of the contract in MWh (1 MWh = 1,000 kWh);
• the region of the national grid the contract relates to;
• the date of signing;
• the start and end dates;
• a range of other data concerning the type of contract and any special clauses.

All contracts on the EC web site from the month leading up to publication of the index are filtered to remove any that:

• are less than 180 days in length the index is about medium and long term contracts;
• are traded on EnergyHedge see note of caution above;
• are not properly verified or in dispute;
• cover less than all periods within the term of the contract;
• are older than two months, ensuring the index is updated with recent data;
• were included in a previous index value, e.g. from last month.

Each of these contract has its price divided by the 'location factor' between its grid region and the Haywards reference node on the national grid. The location factor is taken from Energy Link’s long term price path forecast updated each quarter, and reflects the expected price difference between the contract and Haywards. The objective of this step is to reference all contract prices to Haywards.

Each contract's price is also multiplied by a seasonal adjustment factor which is equal to one if the contract is for a multiple of 12 months, or different to one if the contract covers a part year. This adjustment ensures that all contract prices in the index are based on an annual average price.

The index applies to the 3 year period starting in the month the index is calculated. So the adjusted contract prices are then averaged in each of the relevant 36 months in which they are effective to give a series of 36 monthly average prices. For example, if a contract runs from Jul-10 through to Dec-12 then its adjusted price would be included in the average for only those months. The average is calculated using the volume per day of each contract as a weighting factor, which means that each contract contributes to the index according to its relative size, and ensures that contracts for small volumes can not skew the index.

The ELL index value is then simply the average over the 36 monthly average prices.

In summary then, the ELL index is made up from disclosed contract data from medium to long term non-EnergyHedge contracts covering some or all of the coming 3 years, where the prices are adjusted to be referenced to Haywards, and adjusted to reflect annual average prices. The index itself is an average which weights adjusted contract prices by volume per day and by the number of months contracts are effective in the coming 3 years.