Contract price of a bilateral contract using risk assessment: With application to colombian wholesale electricity market

Abstract

Bilateral contracts are financial instruments to hedge against price volatility in a wholesale electricity market. These contracts have been extensively used for market participants as a mechanism that prevents financial losses. In Colombia, bilateral contracts are mostly used by Load Serving Entities (LSE), which are often called "comercializadores", to lock in its demand and by Generation Companies (GENCOS). One difficulty of establishing a bilateral contract is to find a contract price that fits LSE and GENCOS risk tolerance. That is, LSE and GENCO need to find a contract prices that maximize their profits while keeping the risk below some confidential level. This paper presents a risk assessment methodology that establishes the contract price. This methodology is applied to a LSE in Colombia.