This week the Danish energy regulator, Forsyningstilsynet, announced (click here) an enforcement action against Energi Danmark A/S for alleged capacity hoarding in the Nordic power market in breach of Article 5 of REMIT.
What is it about?
- The case relates to trading activity dating back to January 2020 where Energi Danmark allegedly engaged in capacity hoarding between unspecified bidding zones, assumed to be in the Nordic power market. No attachments accompanied the announcement, and frustratingly little detail is provided in the announcement itself. It does however clarify that the activity involved Energi Danmark trading with itself between two bidding areas – a type of capacity hoarding more commonly known as cross-border wash trading;
- Capacity hoarding, however it is conducted, is considered to be market manipulation under Article 5 of REMIT. At a general level, the practice typically involves the acquisition of a material amount of the available transmission capacity (ATC) between bidding zones to cause, and subsequently benefit from, a divergence in prices between the zones. Fundamental to the behaviour is the failure to use all or none of the acquired capacity. In 2018, ACER published this guidance note on the topic which focuses specifically on intraday power markets. The guidance differentiates between capacity which is explicitly allocated (i.e. the type that is traded on platforms such as JAO) and implicitly allocated (i.e. as is the case in the SIDC or XBID market where capacity is implicitly included with each order);
- Cross-border wash trades relate to implicit capacity allocation, hence it is reasonable to infer that the activity in this enforcement action is likely to be on the intraday power market. The announcement mentions that the activity took place on 3 January 2020 and involved five cases of market manipulation and one attempt to do so. Energi Danmark was fined DKK 380,000 (c.EUR 51,000). The announcement mentions that modest ill-gotten gains of DKK 80,693 (c. EUR 11,000) resulted from the action. The announcement also notes that a 2018 market manipulation case against Energi Danmark for capacity hoarding (click here) was an “aggravating circumstance” in its determination.
Cross-border wash trades are explained further in this 2023 REMIT Quarterly published by ACER, along with several examples which is essential reading for those wishing to understand more about the topic. ACER explains that not all cross-border wash trades constitute market manipulation. In fact, according to ACER between January 2021 and October 2022, 10% of all hourly products traded on the SIDC/XBID market were cross-border wash trades.
Also in 2023, DUR published this guidance on “trading with self” and cross-border wash trades and the Nord Pool exchange featured the topic in this 2023 newsletter. Many will remember this case from 2023 which allegedly involved capacity hoarding in the Danish market which resulted in the arrest of eight traders and managers at an Aarhus-based trading house.
Given the various prompts from several regulatory stakeholders concerning the practice of capacity hoarding, and cross-border wash trades in particular, firms trading in EU power markets, and SIDC/XBID in particular, must ensure controls are in place to prevent such activity (where possible) and that surveillance capabilities are established to detect such behaviour. Neither of these will be straightforward.
The complexity of the underlying market design and the data required to effectively monitor such activity makes this am exceptionally challenging endeavour. Particularly as such activity is not restricted to two adjacent bidding zones but must be considered in the context of all connected bidding zones for which capacity is available. Surveillance vendors do not typically offer an effective surveillance capability in this area off-the-shelf.
Firms are strongly advised to seek a solution however. ACER’s new investigatory powers under REMIT 2, which specifically empower it to investigate cross-border activity, combined with its ability to see data on both sides of the bidding zone make this a heightened risk. On the latter point, should cross-border wash trades be entered into using two different exchanges (such as EPEX Spot and Nord Pool), ACER is also uniquely positioned to detect such behaviour.
