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Metals Producer Fined for Attempted Market Manipulation in the Day Ahead Norwegian Electricity Market

10 November, 2023
Metals Producer Fined for Attempted Market Manipulation in the Day Ahead Norwegian Electricity Market

What Is It About

A metals company that is major player in the Norwegian Electricity Market through its metals smelting operations was fined NOK 5,000,000 by the Norwegian energy regulator for market manipulation in the Norwegian mFRR market used to stabilize grid frequency.

Why It's Important

The case demonstrates that European energy regulators are taking an increasing interest in such balancing markets and is a good illustration of the importance of accurate operational processes and controls to ensure that such ancillary market commitments can be delivered.

Key Takeaways

Although there was not proven malicious intent behind the firm’s activities, a series of questionable decisions resulted in a large fine. There is also an increasing focus by European energy regulators on short term power markets – firms must have appropriate controls in place over this activity.

Table of Contents
Introduction
Compliance Considerations

Introduction

Boliden Odda AS fined NOK $5 million (~ €421,000) for attempted market manipulation - Erroneous orders in the Day-Ahead Norwegian Electricity Market

Boliden Odda AS, a major player in the Norwegian Electricity Market (NEM) through its significant metals smelting operations, was fined NOK 5,000,000 by the Norwegian Energy Regulatory Authority (RME) for market manipulation in the Norwegian part of the mFRR market (the regulating power market, hereafter referred to as “RK”) and the capacity market for mFRR (referred to as the regulating power option market, hereafter “RKOM”).

Boliden is a zinc producer with annual production of approximately 200 kilotons of zinc. As an industrial producer, Boliden is a major consumer of electricity, and is an actor in both the RK and RKOM by offering the ability to reduce its own power consumption to help balance the grid.

The RME notes the following facts related to the enforcement:

  • Boliden participated in the RK and RKOM markets as a power and capacity provider.
  • Boliden submitted misleading orders in the power market which it was not able to fulfill.
  • It submitted a bid to sell power from the reserve market however the trader who entered the bid was unaware of a company maintenance outage period when it entered the order. As a result, it meant Boliden could not make available 30 MW for Statnett (Norwegian System Operator) by reducing their own consumption in line with what Boliden had committed to.
  • Subsequently, Boliden was unable to sell the power and instead of notifying the System Operator, it increased its bid price in an attempt to ensure the bid was not lifted.
  • Boliden noted that the decision to increase the bid price was based on external advisor advice. 

Market Manipulation Violations

The REM infringements were based on Boliden’s violations of NEM regulations on network regulation and the energy market (click here), specifically Section 5: Provisions on Market Conduct and Transparency in the Power Market and sub-sections 5.1 and 5.4 as follows:

  1. The prohibition against market manipulation set out in section 5-4 of NEM cf. section 5-1, seventh definition, letter a) by in two cases having assumed a commitment in RKOM that the company was unable to deliver and thereby giving false signals about offers and prices; and
  2. The prohibition against attempted market manipulation set out in section 5-4 of NEM, cf. section 5-1, eighth definition, letter a) by entering a high price when bidding in RK for a volume the company was unable to deliver with the intention of giving false signals about offers and prices in RK.

Nord Pool bid data provided information to support market manipulation claim.

In its investigation, the RME also reviewed Boliden’s bid data from the daily market in Nord Pool which provided RME with sufficient information to conclude that it is more likely than not that Boliden's bidding had given, or had been likely to give, incorrect signals about offers and prices in RKOM for weeks 40 and 42.

Specifically, it noted that Boliden had sold power back to the market during the period Wednesday, 1 September 2021 (week 35) to Sunday, 31 October 2021 (week 43) because they themselves had significantly reduced consumption during this period due to limited operations as a result of the maintenance shutdown. This implies Boliden was aware of the outage before they submitted the ‘erroneous’ order.

Previously issued guidance from RME – Erroneous orders in the Day-Ahead Market.

The RME previously issued industry guidance (click here) providing guidelines to market participants on how the RME will assess Erroneous Orders in the Day-Ahead (auction) market.

This guidance is referenced in the enforcement decision with the RME noting that “specific intent is not required when deciding whether market manipulation occurred, rather that market conduct rules and prohibition against market manipulation are designed to ensure socioeconomically efficient prices and confidence in pricing.” As noted in the guidance “Actions – including unintentional ones – may still have an impact on the choice of reactive measures or on stipulation of the fine.”

There are some interesting observations stemming from the case as follows: 

  • In its response, Boliden quotes a variety of regulations including REMIT, MAR, and MiFID as part of its defence noting that NEM’s definition of market manipulation was too restrictive, and that Boliden’s error was due to ‘misunderstandings and unfortunate circumstances’ of its trader’s order submission without having knowledge of the maintenance outage extension.
  • RME respond noting that their definition of market manipulation is based on REMIT definitions and MAR is not in scope for any legal defence.
  • RME provide email communications to further evidence Boliden’s knowledge and intent of the market circumstances when modifying its bid price.
  • The RME fined Boliden for submitting erroneous orders even though the bid from Boliden did not affect the price formation, as it could not be executed by the System Operator (and thus posted as a trade and published to market participants to influence prices).
  • The volume of 30MW that Boliden offered in RKM was not actually available, as the company could not in reality deliver this volume.
  • Since the volume was not available, the bid should have been cancelled. RME notes that Boliden’s “bidding must reflect the fundamental conditions in the market, and the bids must be real. This means that they must represent a real wish to buy or sell.”
  • Although the bid was not real, the actual price in RK was correctly based on the actual offer. Boliden's bid in RK therefore did not affect other players' earnings in this market however RME notes that by increasing the price when bidding in RK with the aim of avoiding the bid being activated, instead of notifying Statnett (the Norwegian System Operator), RME believes that Boliden intended to give Statnett incorrect signals about the offer and price in RKM.

icon_target RegTrail Insights

Submission of erroneous orders continues to be a contentious area and monitoring for operational errors is a critical theme for energy firms to invest in. Not all errors are treated as market manipulation but there is an increasing focus on how firms behave after identifying such errors, including for auctions. 

Not all erroneous trades are deemed market abuse.

The Authority for Consumers and Markets (ACM), the Dutch energy market regulator, chose not to penalize an energy firm (click here) despite the fact that the “fat-fingered” error significantly impacted market prices and despite clearly noting that submitting an order that sends an incorrect or misleading price signal falls under the definition of market manipulation.

Also, as a reminder the CRE, the French Energy Regulator, in April 2022 issued a decree (click here) relating to operational errors on wholesale energy markets noting that 'fat fingers' are inside information.

In the Boliden case, evidence was provided including email communications that Boliden intended to mislead markets by increasing its bid price to to avoid being lifted in an attempt to cover for its order submission error knowing that it would not be able to cover the delivery of physical power required.

Rather than alerting the System Operator, on the advice of an external advisor, it manipulated its order price to ensure its bid was not lifted and thus would not be required to deliver power.

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Table of Contents
Introduction
Compliance Considerations

Introduction

Boliden Odda AS fined NOK $5 million (~ €421,000) for attempted market manipulation - Erroneous orders in the Day-Ahead Norwegian Electricity Market

Boliden Odda AS, a major player in the Norwegian Electricity Market (NEM) through its significant metals smelting operations, was fined NOK 5,000,000 by the Norwegian Energy Regulatory Authority (RME) for market manipulation in the Norwegian part of the mFRR market (the regulating power market, hereafter referred to as “RK”) and the capacity market for mFRR (referred to as the regulating power option market, hereafter “RKOM”).

Boliden is a zinc producer with annual production of approximately 200 kilotons of zinc. As an industrial producer, Boliden is a major consumer of electricity, and is an actor in both the RK and RKOM by offering the ability to reduce its own power consumption to help balance the grid.

The RME notes the following facts related to the enforcement:

  • Boliden participated in the RK and RKOM markets as a power and capacity provider.
  • Boliden submitted misleading orders in the power market which it was not able to fulfill.
  • It submitted a bid to sell power from the reserve market however the trader who entered the bid was unaware of a company maintenance outage period when it entered the order. As a result, it meant Boliden could not make available 30 MW for Statnett (Norwegian System Operator) by reducing their own consumption in line with what Boliden had committed to.
  • Subsequently, Boliden was unable to sell the power and instead of notifying the System Operator, it increased its bid price in an attempt to ensure the bid was not lifted.
  • Boliden noted that the decision to increase the bid price was based on external advisor advice. 

Market Manipulation Violations

The REM infringements were based on Boliden’s violations of NEM regulations on network regulation and the energy market (click here), specifically Section 5: Provisions on Market Conduct and Transparency in the Power Market and sub-sections 5.1 and 5.4 as follows:

  1. The prohibition against market manipulation set out in section 5-4 of NEM cf. section 5-1, seventh definition, letter a) by in two cases having assumed a commitment in RKOM that the company was unable to deliver and thereby giving false signals about offers and prices; and
  2. The prohibition against attempted market manipulation set out in section 5-4 of NEM, cf. section 5-1, eighth definition, letter a) by entering a high price when bidding in RK for a volume the company was unable to deliver with the intention of giving false signals about offers and prices in RK.

Nord Pool bid data provided information to support market manipulation claim.

In its investigation, the RME also reviewed Boliden’s bid data from the daily market in Nord Pool which provided RME with sufficient information to conclude that it is more likely than not that Boliden's bidding had given, or had been likely to give, incorrect signals about offers and prices in RKOM for weeks 40 and 42.

Specifically, it noted that Boliden had sold power back to the market during the period Wednesday, 1 September 2021 (week 35) to Sunday, 31 October 2021 (week 43) because they themselves had significantly reduced consumption during this period due to limited operations as a result of the maintenance shutdown. This implies Boliden was aware of the outage before they submitted the ‘erroneous’ order.

Previously issued guidance from RME – Erroneous orders in the Day-Ahead Market.

The RME previously issued industry guidance (click here) providing guidelines to market participants on how the RME will assess Erroneous Orders in the Day-Ahead (auction) market.

This guidance is referenced in the enforcement decision with the RME noting that “specific intent is not required when deciding whether market manipulation occurred, rather that market conduct rules and prohibition against market manipulation are designed to ensure socioeconomically efficient prices and confidence in pricing.” As noted in the guidance “Actions – including unintentional ones – may still have an impact on the choice of reactive measures or on stipulation of the fine.”

There are some interesting observations stemming from the case as follows: 

  • In its response, Boliden quotes a variety of regulations including REMIT, MAR, and MiFID as part of its defence noting that NEM’s definition of market manipulation was too restrictive, and that Boliden’s error was due to ‘misunderstandings and unfortunate circumstances’ of its trader’s order submission without having knowledge of the maintenance outage extension.
  • RME respond noting that their definition of market manipulation is based on REMIT definitions and MAR is not in scope for any legal defence.
  • RME provide email communications to further evidence Boliden’s knowledge and intent of the market circumstances when modifying its bid price.
  • The RME fined Boliden for submitting erroneous orders even though the bid from Boliden did not affect the price formation, as it could not be executed by the System Operator (and thus posted as a trade and published to market participants to influence prices).
  • The volume of 30MW that Boliden offered in RKM was not actually available, as the company could not in reality deliver this volume.
  • Since the volume was not available, the bid should have been cancelled. RME notes that Boliden’s “bidding must reflect the fundamental conditions in the market, and the bids must be real. This means that they must represent a real wish to buy or sell.”
  • Although the bid was not real, the actual price in RK was correctly based on the actual offer. Boliden's bid in RK therefore did not affect other players' earnings in this market however RME notes that by increasing the price when bidding in RK with the aim of avoiding the bid being activated, instead of notifying Statnett (the Norwegian System Operator), RME believes that Boliden intended to give Statnett incorrect signals about the offer and price in RKM.

icon_target RegTrail Insights

Submission of erroneous orders continues to be a contentious area and monitoring for operational errors is a critical theme for energy firms to invest in. Not all errors are treated as market manipulation but there is an increasing focus on how firms behave after identifying such errors, including for auctions. 

Not all erroneous trades are deemed market abuse.

The Authority for Consumers and Markets (ACM), the Dutch energy market regulator, chose not to penalize an energy firm (click here) despite the fact that the “fat-fingered” error significantly impacted market prices and despite clearly noting that submitting an order that sends an incorrect or misleading price signal falls under the definition of market manipulation.

Also, as a reminder the CRE, the French Energy Regulator, in April 2022 issued a decree (click here) relating to operational errors on wholesale energy markets noting that 'fat fingers' are inside information.

In the Boliden case, evidence was provided including email communications that Boliden intended to mislead markets by increasing its bid price to to avoid being lifted in an attempt to cover for its order submission error knowing that it would not be able to cover the delivery of physical power required.

Rather than alerting the System Operator, on the advice of an external advisor, it manipulated its order price to ensure its bid was not lifted and thus would not be required to deliver power.

Compliance Considerations

Case Event Sequence

The sequence of case events are summarised as follows:

  1. 28 September 2021 (Tuesday week 39): Start of Boliden maintenance;
  2. Boliden sells 69.4 MW in the 24-hour market from 28 September at 06:00 to 21 October 2021 11:00 am;
  3. Boliden was awarded a licence in RKOM for week 40;
  4. 15 October 14.00: Boliden was awarded a contract in RKOM for week 42 (the bid deadline was 15 October 12.00);
  5. 15 October at 15:59: Boliden increased the bid price in RK;
  6. Morning of 18 October: Boliden was not able to regulate up as requested;
  7. 21 October: Maintenance is finalised.

Overview of RKOM Market

  • Statnett is the system operator who, among other responsibilities, manages power imbalances by purchasing power in the reserve markets.
  • RKOM is a capacity market where providers are paid to guarantee that they participate in the RK market. RKOM is an instrument to ensure a sufficient amount of regulated power is available to cover national and regional needs at a bidding area level.
  • Power from both production and consumption can be traded in RKOM. Power-intensive industry participants contribute flexibility by being able to quickly reduce consumption. Participation in this market is voluntary.
  • Conditions for Participation in RKOM: RKOM has two products: 'RKOM High Quality' (RKOM-H) and 'RKOM With Limitations.' Bidding deadlines are specified for different market periods, and once bids are accepted, they cannot be changed or withdrawn.
  • When bidding in RKOM-H, market participants cannot remove accepted options from the RC [NVE-RME regulates network companies using an incentive-based revenue cap (RC) model]. This means that the market participant cannot change its bidding in the RC as a result of changed power consumption, but is obliged to make resources available in the RC when they have been awarded a bid in RKOM-H.
  • Non-fulfilment consequences include potential reductions in remuneration, and market participants must inform Statnett of matters affecting their obligations.

Boliden's Behaviour in October 2021

  • Boliden submitted bids and was awarded contracts in RKOM for delivery in weeks 40 (i.e. 4-10 October) and 42 (18-24 October), but faced challenges fulfilling commitments as it had a maintenance shutdown at its facilities that started on 28 September 2021 and which were not completed until Thursday 21 October 2021.
  • The maintenance shutdown affected Boliden's capacity to deliver as committed in the RKOM for week 42.
  • On Monday 18 October 2021, Statnett contacted Boliden by telephone at approx. 07:05 (i.e. Monday week 42) and asked Boliden to fulfil its 30 MW bid however Boliden reported that they could not fulfil it by reducing their own consumption due to the maintenance shutdown.
  • The person in Boliden who submitted the bid for week 42 was not aware that the planned maintenance shutdown had been extended to the period to which the bid applied. When it became known to Boliden that the company had submitted a bid in RKOM for week 42 that the company could not meet, the deadline for correcting the bid had expired.
  • On Friday 15 October 2021, Boliden therefore contacted the person who handled the notification in RK on behalf of Boliden to inquire about what Boliden could do to reduce the chance of being required to deliver the power it bid.
  • According to Boliden, they received advice from an external advisor (whose name is redacted in the notice) to increase the bid price in RK in order to reduce the likelihood of the bid being accepted. In an email to Statnett on 18 October 2021 at 10:00, Boliden wrote:

"To reduce the chance of being taken out, I contacted Kinect to enquire about what we could do. Based on the weather forecasts, there was little chance that we would be taken out this week, and since we are already down, there is more power in the market than there would otherwise be. We agreed to increase the price to reduce even more the chance of being taken out."

  • A further internal email (which is heavily redacted) timestamped at 15:59 on 15 October 2021 appears to denote that Boliden had already increased the bid price prior to notifying the System Operator:

“I have increased the price of the bid to [redacted] to reduce the possibility of you being activated. I can reduce the price to [redacted] once you are back to normal operation. Please provide feedback if anything needs to be changed on FiftyWeb."

  • Boliden sought to reduce the chance of its bid being required for delivery by increasing the bid price in RK. In its defence, it notes that there was a communication failure internally and that the person who submitted the bid for week 40 was not aware of the maintenance shutdown at the time the bid was submitted.

 

Boliden's Response to RME’s inquiry

  • Notification of Fine.
  1. RME notified Boliden of a fine on 29 June 2023 for the company's alleged breach of market manipulation and attempted market manipulation rules in reserve markets.
  • Boliden's Agreement on Facts.
  1. Boliden responded on 24 August 2023, generally agreeing with the sequence of events and facts presented by RME.
  2. It emphasized two key matters related to the lack of awareness about maintenance shutdowns during bid submissions for weeks 40 and 42.
  • Legal Challenges Raised by Boliden.
  1. Boliden challenged the notion that its bidding constitutes market manipulation and argues that orders were submitted due to unfortunate circumstances and misunderstandings.
  2. The upward adjustment of the bid price for week 42 was made on the advice of a professional advisor to minimize the risk of market disruption.
  • Interpretation of Market Manipulation.
  1. Boliden contends that the Norwegian wording in NEM rules should be interpreted in line with practices in financial markets, citing the Market Abuse Regulation (MAR) and referencing REMIT.
  2. Boliden argues, with reference to paragraph 13 of the preamble and Article 2(2) of REMIT, that the prohibition of market manipulation in the physical power market includes orders that "are likely to give, false or misleading signals".
  3. Furthermore, Boliden argues that according to the preamble and Article 1(1) of REMIT, it is "abusive practices" that are covered by the prohibition against market manipulation. In other words, more or less advanced manipulation strategies are being targeted thus the terms "false or misleading" and "abusive practices" are more accurate than the Norwegian wording chosen in NEM rules to illustrate manipulative intentions that the prohibition is intended to target, not misunderstandings and unfortunate circumstances.
  • Comparison with Financial Market Regulations.
  1. Boliden draws parallels between regulations in physical power trading and financial market regulations, referring to older practices and the Market Abuse Regulation (MAR).
  2. It refers to a list of indicators of illegal market manipulation from MAR, asserting that none of these indicators apply to Boliden's situation.
  • Intent and Behaviour.
  1. Boliden asserts that while intent may not be a requirement in Norwegian law, highly reprehensible and fraudulent behaviour is necessary, which the company claims is not present in this case.
  • Subjective Awareness.
  1. Boliden challenges the notion that there was a qualified preponderance of probability that the company should have realized the bidding actions constituted market manipulation.
  2. It highlights legal uncertainties regarding the culpability requirement under section 46 of the Official Secrets Act.
  • Dispute Over Infringement Fee.
  1. Boliden argues that the infringement fee of NOK 5,000,000 is too high and suggests a reduction to NOK 1,111,500.
  2. It references the Financial Supervisory Authority of Norway's practice for managing sanctions related to market behaviour rules and argues that the fine should not exceed three times the profit achieved.

 

RME’s reply to Boliden’s responses

  • Prohibition of Market Manipulation.
  1. Market manipulation and attempted market manipulation are explicitly prohibited under section 5-4 of NEM rules in the context of wholesale energy markets.
  2. The Energy Act, specifically section 1-2, emphasizes the need for energy trading to occur in a socially rational manner.
  • Interpretation of NEM Chapter 5 and MAR.
  1. Boliden's comments assert that market conduct rules in NEM chapter 5 should align with the regulation of market abuse in financial markets, as outlined in the Market Abuse Regulation (MAR).
  2. RME notes that neither Annex 1 to MAR, nor ESMA's predecessor CESR's guidance CESR/04-505b are directly relevant as a source of law.
  • Role of ACER Guidance.
  1. The national regulatory provisions in NEM chapter 5 are partially adapted from the REMIT Regulation applicable in EU countries.
  2. ACER guidance, mentioned in the preamble to REMIT point 27, is considered relevant by RME for interpreting and applying market behaviour rules.
  3. For this specific case, it is particularly what is stated in chapter 6 of the ACER guidance on the prohibition of market manipulation and attempted market manipulation that is relevant as a guideline.
  • Definition of Attempted Market Manipulation.
  1. Attempted market manipulation, defined in NEM section 5-1 eighth definition, involves entering a transaction or submitting a trade order with the intention of giving false or misleading signals.
  2. Unlike market manipulation, attempted market manipulation requires a deliberate choice by the market participant.
  • Intent in Attempted Market Manipulation.
  1. Intent is a key factor in attempted market manipulation, requiring a deliberate choice to give false signals, regardless of whether the intended effect is achieved.
  2. This aligns with the interpretation of a corresponding provision in REMIT, emphasizing intentional acts even if unsuccessful.

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