The award was created in 2011 by BBC Radio 1 presenter Huw Stephens and promoter John Rostron.
This year's shortlist includes a mix of established artists and emerging stars, with songs that embrace a range of genres, sounds and influences.
Past winners of the prize include Gwenno and Gruff Rhys.
The 2016 shortlist of artists and their albums:
9Bach - Anian
Alun Gaffey - Alun Gaffey
Cate Le Bon - Crab Day
Climbing Trees - Borders
Datblygu - Porwr Trallod
Meilyr Jones - 2013
Plu - Tir a Golau
Right Hand Left Hand - Right Hand Left Hand
Simon Love - It Seemed Like a Good Idea at the Time
Skindred - Volume
Swnami - Swnami
The Anchoress - Confessions of a Romance Novelist
The winner will be chosen by a panel of industry experts including musician Amy Wadge, Dwynwen Morgan from BBC Radio Cymru and critic Lowri Cooke.
The winner will be announced on 24 November at The Depot in Cardiff.
Mr Rostron, from the Welsh Music Prize, said: "So many great albums are being released from Wales at the moment - it's a really good time to be listening to new music and finding some new favourites."
A shortlist of 12 artists has been announced for the Welsh Music Prize 2016.