This will tie in to the concept Nasecore and Pete Ilagan have put forward.
First, what’s a Forward market? A Forward market is one in which people can trade electricity for future delivery but at prices that are agreed to today.
Say you want 100 MW of 7×24 supply for the month of March 2007. In a Forward market, with price transparency, you can see what March 2007 7×24 Forwards are trading at and decide if you want to go purchase that obligation now or not. One of your alternatives may be to just wait and buy the 100 MW in the spot market at the then-prevailing prices when March 2007 gets here.
Now imagine that there are forward markets for all future months over the next five years. Each of the future month’s contracts are trading at different prices (maybe the price is declining over time, or increasing, or jumping around). You can then go out a buy a “strip.” A five year strip would contain, say, a 100 MW block for each month over the next five years. You have then just tied down your cost of a five-year, 100 MW block of power.
Now, say, you have an opportunity to purchase power from an IPP under a five year power sales agreement. With the Forward market in place you can calculate a mark-to-market value for the IPP contract and tell if it’s “above market” or “below market.”
The decision to buy the IPP is still not cut and dried – there are other considerations. But the mark-to-market value is an important piece of information.
Back to Nasecor’s idea of putting spot prices and IPP prices on consumer bills. A comparison of an IPPs price for the current month compared to spot is rather uninsightful. But a comparison of a five-year IPPs five-year price to a five-year strip is immediately insightful (though not necessarily indicative of prudence).
Not that such a comparison should be on consumer bills; but that, nevertheless, is the comparison one would want to make.