Questions & Answers: Preventing abuse in wholesale energy markets
Who are the traders in wholesale energy
Beyond energy producing companies, a wide range
of actors including large energy users, traders,
investment banks and funds sell and buy gas and
electricity. Energy suppliers will then sell it
Where is gas and electricity sold?
Energy can be traded at exchanges, which are
organized marketplaces for energy commodities.
Around 15 such energy exchanges exist in the EU.
Examples: Nord Pool Spot, Nasdaq OMX commodities,
Energy is traded between companies without going
through an exchange (over the counter deals, OTC).
This can be done directly or via brokers.
overall majority of energy in the EU is traded
OTC: In 2009, 75 percent of electricity was
traded OTC, only 25 percent via power exchanges.
Why is there a need for EU regulation?
Successive European energy liberalization
packages have led to a steady increase in the
volumes traded in power. Between 2000 and 2009
overall volumes of traded electricity (exchanges
and OTC taken together) increased from 3500 TWh
to 10000 TWh. Before 2000, liquid wholesale
markets only existed in the UK and in the Nordic
countries around Nord Pool.
Cross border trade: Energy is often traded
between market participants in two or more
different countries. In Germany for example,
less than 6% of derivative electricity
transactions for delivery in the country takes
place through the European Energy Exchange in
Germany. Set against this, 94% of German power
trades are made through intermediaries based
outside the country.
What do you want to achieve through the
Prices established on wholesale markets serve as
a benchmark for retail prices for household
consumers and industrial users. It is for this
reason that the regulation aims to have market
transparency and to prevent insider trading and
market abuse which can lead to higher prices.
Do prices on wholesale markets influence prices
for household users?
Wholesale prices are a key factor that
influences suppliers' pricing. Depending on the
purchasing strategy of a supplier and the level
of competition on the market, price changes on
wholesale markets will sooner or later impact
every consumer's energy bill.
Are there cases of price manipulation in the
we have no EU data at the moment, this is
difficult to say. Since market abuses are
currently not effectively prohibited on
wholesale energy markets, oversight in the EU is
fragmented with rules only defined at Member
State level and restricted to apply on few
market places. As individual Member States do
not have access to all the data on cross-border
transactions, it is difficult to fully
understand what is going on in these markets and
effectively detect abuse.
the USA, several cases of market abuse have led
to higher energy prices, costing the consumer
billions of US-Dollar. One example: Amaranth
Advisors LLC, a hedge fund has accumulated
massive natural gas holdings in the form of
derivatives between 2006-2010, pushing up prices
and making huge profits. It is assumed that an
Amaranth-style market manipulation would inflate
gas and electricity bills of European businesses
and industrial users by some Euro 1 billion.
What are the measures proposed?
Prohibition to use inside information or
manipulate energy markets
Establishment of a European market
monitoring function within the Agency for
the Cooperation of Energy Regulators (ACER)
to effectively detect market abuse
Effective arrangements to collect data for
market monitoring purposes
Set up of a framework to share such data
between competent national authorities
Laying down rules for data protection and
ACER to ensure that the rules are coherently
enforced across the Union
Requirement for Member States to adopt
penalties which are proportionate and
Why isn't existing financial legislation
sufficient to control wholesale energy markets?
Financial regulation, in particular the Market
Abuse Directive (2003/6/EC) and the Markets in
Financial Instruments Directive (MiFID), is
designed for financial markets. They apply to
financial instruments traded on a regulated
market. This means that only energy derivatives
traded at energy exchanges are covered by these
Directives. For electricity, this is 16% of the
total volumes traded.
Tailor made rules are also needed to take into
account energy specific market abuses, such as
withholding of energy production from the market
to increase prices. Electricity cannot be stored
on an industrial scale. It must be produced in
the moment it is consumed. This means that
market prices are highly sensitive to the
availability of generation capacities. To a
lesser extent, the same concerns apply to gas
What are spot markets? What derivatives?
contrast to contracts to actually buy and sell
power or gas immediately (spot), energy
derivatives are contracts where the delivery of
the commodity is foreseen in the future. The
main aim of derivatives is to hedge price risks.
How many traders are there in Europe?
There are a few hundred companies trading energy
How many transactions are there per day on
is estimated that there are between 6000 and 10
000 transaction every day.
Which markets and products are concerned?
measures will apply to wholesale electricity and
gas contracts including contracts for the
transportation of these commodities. They will
not apply to supplies to final customers.
When will the new rules be in force?
Regulation should enter into force by 2012 after
its adoption by the Council and European