The Impact of a Market Maker in an Electricity Market

Sebastián Arias (), Adriana M. Santa-Alvarado and Harold Salazar
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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

Energies, 2024, vol. 17, issue 16, 1-18

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.

Keywords: market maker; inefficiencies of the OTC market; market risk; electricity market; energy futures (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2024
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