A case for transparency in the power market
How the (energy) sausage is made: A case for transparency in the power market

If you don’t want to ruin your appetite, you really don’t want to know what’s involved in making a sausage; (rumor has it that there is some shady stuff going on). This is the total opposite to politics, consumer markets and also the liberalized energy market, where you certainly want to know how ‘the sausage is made’. Here, having all relevant data accessible can prevent shady stuff from happening in the first place, which can have a huge impact on the system’s efficiency.

You see, in the energy market, transparency isn’t just part of the industry jargon; it’s fundamental to the market’s existence, especially when you consider the market’s tight margins and the vital role of energy in the economy. Having access to key data simply ensures that market participants operate on a level playing field, which helps to create a fair competition and optimizes resource allocation.

The market should be built on every participant having access to vital market data; a lack of which would lead to a rise in market inefficiencies, higher costs for consumers and reduced market confidence. Just imagine if critical market data were suddenly inaccessible: pure chaos would ensue. Under the cover of darkness, some folk could take advantage of an asymmetric access to data. This is why there is so much more need for catching-up in transparency regulations to shine a light onto hidden information.

 

Insider trading in Germany

A recent case of insider trading in Germany painfully illustrates the severe consequences of lacking transparency. According to a report by Montel, companies that help balance Germany’s electricity grid have been abusing their privileges to trade in the electricity market using inside information. This malpractice has likely been ongoing for at least 15 years, with significant financial implications.

 

How the scheme works

Only selected companies are qualified to provide balancing energy, which maintains grid stability by addressing sudden deviations between supply and demand. These companies receive activation signals from grid operators, but the signals are not disclosed in real-time, which give the receiving companies an advantage in the intraday market. Knowing about a system imbalance ahead of time allows these companies to make trades that capitalize on this knowledge, often resulting in substantial profits.

Like on June 3, a significant shortfall in solar energy led to a spike in intraday market prices, with some periods reaching the market’s ceiling of EUR 9,999/MWh. Those who were wise to balancing signals could foresee a sharp decline in supply, profiting by trading ahead of the rest of the market. This practice, described as “the mother of all insider signals,” is a striking example of the high stakes and significant profits involved.

 

Regulatory lag

Despite multiple complaints over many years and an investigative study by energy consultant Lion Hirth back in 2021, regulators have been slow to act. The Federal Network Agency, Germany’s regulator, has so far not identified any breaches, despite substantial evidence of malpractice. 

But this German insider trading scandal is not an isolated incident. For instance, it’s known that a messaging group exists where traders share tips about balancing market events, and similar back-channel communication could easily exist off the radar of regulators.

In another known practice, a trader, aware of what screens a particular customer does and does not have access to, could leverage information from platforms the customer can’t see to make immediate profits on the spread, effectively extracting money from the customer’s pocket.

The social costs of such activities are high. They undermine trust in the market, lead to inefficiencies, and ultimately increase costs for consumers. 

 

This is how other markets live transparency

By publishing transparency data publicly, other energy markets have implemented more transparent practices, setting benchmarks that highlight the deficiencies in the German market. 

The UK provides a model of transparency with Elexon, which publishes real-time data about the balancing market, completely avoiding the problem seen in Germany. UK generators must also publish demand forecasts 14 days ahead, day-ahead, and intraday every 30 minutes. This level of transparency ensures that all market participants have access to the same information, reducing the potential for insider trading.

The Baltic Transparency Dashboard (BTD) similarly offers a comprehensive view of the current balancing state and real-time data on activations, balancing prices, and more, across Estonia, Latvia and Lithuania. This tool is instrumental in promoting market transparency and ensuring that all participants operate with the same information.

 

Regulatory framework: REMIT regulation

Of course, the rest of Europe is not exactly a Wild West of energy trading. To prevent wholesale market abuse, the EU’s REMIT regulation mandates extensive reporting. It requires market participants to disclose inside information, thus ensuring a high degree of transparency. However, the implementation and enforcement of these regulations vary across member states, suggesting that further harmonization and strengthening of these rules are necessary.

 

Our role in promoting transparency

At Navitasoft, we are committed to delivering greater transparency to European energy markets. For instance, we developed the Baltic Transparency Dashboard (BTD), which provides real-time data on the Baltic balancing market, freely visible to everyone. Such tools are essential for ensuring that all market participants have access to the same information, thereby promoting fair competition and reducing the potential for market abuse.

Transparency is a fundamental necessity in the liberalized energy market. The recent insider trading scandal in Germany underscores the high costs of lacking transparency. While it’s hard to put a number to it, estimates of the costs of the German scandal alone range from €50M to €200M per year, ultimately paid for by consumers.  Knowledge is power - and so knowledge shared is also power shared. By adopting best practices from other markets and enforcing stringent regulatory frameworks, we can enhance transparency, promote fair competition, and ultimately benefit consumers. As stakeholders in the energy market, it is our collective responsibility to advocate for and implement measures that ensure transparency and fairness for all participants.