Out-Law News 3 min. read

UK regulator ‘investigating certain actions’ as part of wholesale energy market competition work


The UK’s energy market regulator has already spoken to some firms about behaviour that could potentially be seen as abusive as part of its new powers to tackle market abuse in the wholesale energy markets, it has said.

In an open letter, published on its website last week, Ofgem said that it had been “monitoring the GB market and investigating certain actions” under the EU’s regulation on wholesale electricity and gas market integrity and transparency (REMIT). It used its open letter to “make [its] views in relation to that behaviour known to GB market participants more broadly”, and to “remind market participants of their duty to publish inside information in an effective and timely manner”.

REMIT prohibits market abuse in wholesale energy markets, whether in the form of insider trading or attempted or actual market manipulation. It also establishes a monitoring regime for wholesale energy trading, and requires EU member states to put in place enforcement and penalty regimes for regulatory breaches.

The regulation has applied in the UK since June 2013, at which point Ofgem gained new investigatory and enforcement powers. Among those is the ability to impose unlimited fines for breaches of the new regime.

REMIT defines market manipulation as entering into any transaction or issuing any order to trade in wholesale energy products which gives, or is likely to give, false or misleading signals about the supply of, demand for or price of one of those products. It can occur without any real-world impact on supply, demand or price; and only one of those criteria needs to be met in order for a breach to occur. There is also no need for there to have been “intent” for an offence to occur.

In its letter, Ofgem said that market participants should “take due care to ensure that erroneous trading does not accidentally result in outcomes that could constitute a breach of REMIT”. It also identified a number of practices it had observed in the market that it considered amounted to market manipulation. These included “layering”, which occurs when traders enter a series of bids that they do not intend to execute at steadily increasing prices in an attempt to manipulate the price of a commodity; and trades involving a pre-arranged price or volume.

Ofgem also highlighted a practice called “marking the close” as an example of market manipulation. This involves deliberately buying or selling wholesale products at the close of the market in a way that attempts to set an artificial closing price for that product. Market participants should be “particularly mindful of how their trading may affect the closing or assessed price”, Ofgem said.

The regulator said it had similar concerns about the practice by traders of making small bids ahead of placing large orders, “and vice versa”.

“Through our monitoring we have noticed incidents whereby a number of small orders and trades at prices which do not reflect market fundamentals occur around the opening of markets, particularly in intraday power markets,” it said in its letter.

“We understand market participants may undertake this practice as a means of price discovery. However, we urge market participants to carefully consider how they do this. We consider that the submission of relatively small orders at prices which do not reflect market fundamentals ahead of relatively large orders in the opposite direction (sell or buy) could create a false or misleading signal as to supply, demand or price of wholesale energy products, which may constitute market manipulation, as defined [by REMIT],” it said.

Some firms also needed to do more to comply with inside information disclosure requirements set out in REMIT, Ofgem said in its letter. REMIT requires companies to publicly disclose certain information that could affect pricing, such as details about unplanned outages, on their websites or on other platforms as soon as possible so that other market participants are quickly made aware of the situation.

Companies should not use “thresholds” to determine whether they should make such a notification, as such thresholds are not included in REMIT, Ofgem said. Instead, disclosures should be made based on an assessment “against the definition of inside information under REMIT”. This would usually “depend on market conditions at the relevant time”, it said. The letter also warned companies that disclosing this information to other market participants, investors and other stakeholders before making it publicly available could breach the rules.

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