Volume 22, No. 02, Month JUNE, Year 2022, Pages 111 - 122

Risk premium in colombia wholesale electricity market

David Esteban Rodriguez, Alfredo Trespalacios, Javier Orlando Pantoja

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The FRP is the implicit payment received by the buyer or seller assuming the market risk used in the long-term transaction in electricity markets using forward contracts; however, the difficulties of long-term storage energy do not allow possible arbitrage opportunities over time when cost-of-carry techniques are applied. In these conditions, the spot price expectations determine the price of electricity contracts, which produce a Forward Risk Premium (FRP) in the transactions. This manuscript measures the ex-post FRP of the Colombian electricity market in a monthly time series to identify the risk hedging in the agent"es contract. The FRP in Colombia presents two structural changes and seasonality and mean reversion patterns, showing the buyers of energy contracts are better paid concerning the spot price, showing an arbitrage problem in contracts. The paper results will do a tool for participants and policymakers to consider the risk involved in the energy transactions through FRP value.


ARIMA model; Electricity market; Forward risk premium; Structural change; Time series


Published by : Asian Institute of Technology
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