Opportunities for seasonal forward contracts in the Colombian electricity market

A characteristic feature of electricity prices in countries that highly depend on their hydrology resources is their great volatility. Therefore, it is expected that market participants enroll in forward and bilateral electricity contracts to reduce their risk and hedge from price volatility. Bearing in mind the seasonality of water resources in Colombia it is sensible to think of an energy contracting mechanism that would take advantage of it. Such mechanism is the so called seasonal forward contract that would provide lower energy prices during the rainy season so that customers (such as energy intensive industries) are encouraged to increase their demand, leading to a scenario that would benefit both, generators and consumers. This paper presents a review on electricity prices and their relationship with hydrology as well as a discussion over the opportunities on seasonal forward contracting in the Colombian electricity market and its potential advantages.