Market Liquidity in Colombia as a Structural Condition for Energy System Transformation

Electricity generation is inherently capital-intensive, making investment decisions highly dependent on robust contracting frameworks, effective hedging mechanisms, and sufficiently liquid markets. The increasing integration of intermittent renewable energy sources introduces further variability and uncertainty in generation conditions. In this context, the development of strong financial instruments and more liquid markets is a structural requirement for achieving a sustainable and equitable energy transition.

International experience highlights the effectiveness of mechanisms such as dynamic intraday markets, implicit auctions, standardized products, and derivatives platforms in managing supply variability and facilitating the integration of non-conventional renewable sources. These tools enhance price discovery, strengthen competition, and enable efficient responses to fluctuations in supply and demand. In Colombia, the wholesale electricity market was established in 1995, enabling generators and retailers to purchase energy through bilateral long-term contracts or the spot market.

Complementary instruments such as the Reliability Charge and ancillary services, currently limited to Automatic Generation Control, support overall system adequacy and security.

However, local conditions intensify market challenges. The El Niño phenomenon, associated with prolonged dry seasons, reduces hydropower availability. Combined with demand variability, limited storage capacity, and the growing share of renewable energy, these factors increase price volatility and uncertainty. Consequently, market participants may be less willing to engage in trading, particularly in forward or bilateral markets, leading to liquidity gaps in key segments. Strengthening short-term contracting, improving market integration, attracting new participants and broadening participation are essential steps toward building a more resilient and liquid electricity market.

To address these issues, regulators have implemented measures aimed at increasing transparency, enhancing price formation, and reducing transaction barriers. Restrictions on selfdealing among vertically integrated companies have been introduced, public tenders standardized to broaden participation, and Over The Count contracts unified to reduce information asymmetries and improve bilateral trading efficiency. Additionally, the

Standardized Energy Commodity Derivatives System provides tools for hedging price volatility, fostering confidence and market depth. Technological innovations such as SIMEM,

Colombia’s first open-data portal for the electricity market, and the use of blockchain for managing bank guarantees have further enhanced transparency and operational efficiency.

Finally, this study explores the impacts and emerging opportunities within the Colombian wholesale market that enable greater participation by market agents and support an effective and sustainable transition.