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The Impact of a Market Maker in an Electricity Market

Author

Listed:
  • Sebastián Arias

    (Faculty of Business Science, Universidad Tecnológica de Pereira, Pereira 660003, Colombia)

  • Adriana M. Santa-Alvarado

    (Faculty of Business Science, Universidad Tecnológica de Pereira, Pereira 660003, Colombia)

  • Harold Salazar

    (Faculty of Engineering, Universidad Tecnológica de Pereira, Pereira 660003, Colombia)

Abstract

Electricity retailers in an electricity market use over-the-counter (OTC) contracts, or bilateral, and spot market purchases to meet the energy demands of their users. In some markets, OTC contracts face issues with price discrimination and accessibility. This study reveals some inefficiencies of OTC contracts in Colombia that expose regulated users—approximately 70% of the national demand—to market risk. This risk is aggravated by the current tariff design. To mitigate these inefficiencies, this article proposes the incorporation of a market maker that will improve the liquidity of existing energy futures in the country. These futures are mechanisms that the retailers could implement to hedge their demand and reduce the adverse effects of market risk. The characteristics of the market maker and a quantitative analysis of its impact are developed in this paper. While the characterization of the problem with its solution is developed with Colombian data, the conceptual framework could be extended to other countries that are concerned about how energy users are being affected by increases in tariffs due to high exposure to spot market price volatility.

Suggested Citation

  • Sebastián Arias & Adriana M. Santa-Alvarado & Harold Salazar, 2024. "The Impact of a Market Maker in an Electricity Market," Energies, MDPI, vol. 17(16), pages 1-18, August.
    • Handle: RePEc:gam:jeners:v:17:y:2024:i:16:p:4042-:d:1456515
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    References listed on IDEAS

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    1. Jorge Barrientos Marin & Elkin Tabares Orozco & Esteban Velilla, 2018. "Forecasting electricity price in Colombia: A comparison between Neural Network, ARMA process and Hybrid Models," International Journal of Energy Economics and Policy, Econjournals, vol. 8(3), pages 97-106.
    2. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
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    5. H. N. E. BystrOm, 2003. "The hedging performance of electricity futures on the Nordic power exchange," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 1-11.
    6. Liu, Hong & Wang, Yajun, 2016. "Market making with asymmetric information and inventory risk," Journal of Economic Theory, Elsevier, vol. 163(C), pages 73-109.
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