Valuation of forward contracts in electricity markets. Application to the ecuadorian market

Abstract

One of the main characteristics in the electricity markets is the volatileness of the spot price. The uncertainty associated to the price is a source of risk as much for the selling agents (generation companies) like for the buying agents. For this reason, is necessary to develop tools and methodologies of analysis, valuation and risk management associated to the generation business. This paper proposes, formulates and develops a procedure for the valuation of forward contracts with the objective to obtain a suitable balance between risk and rentability in the context of the generation companies that operate in the ecuadorian electricity market.