Economic effects in wholesale electricity markets from endogenous long-term forward contracts indexed to spot conditions

This analysis examines the economic impact of endogenous forward contracts (EFCs) in wholesale electricity markets, where contract hedging adjusts to spot market conditions rather than remaining fixed. This study applies economic theory to model the effects of forward contracts on spot prices over time and develop an econometric strategy for evaluation. By applying this framework to the Colombian electricity market, we find that a 5% share of EFCs can raise spot prices by 23%, increasing consumer costs by more than $700 million annually. These effects may intensify during extreme weather events, such as El Niño, exposing risks in market design. Our findings challenge the assumption that forward contracts inherently enhance competition and price stability, showing that firms with market power can exploit them. Results remain robust and statistically significant under various scenarios, including different opportunity costs. These insights underscore the need for regulatory oversight to ensure forward contracting fosters competitive outcomes, providing a strong foundation for improving market regulation in Colombia and other jurisdictions.