Insider trading allegations

A Montel News investigation has aired claims of insider trading in Germany’s power market. Signals received by some to help balance the grid are allegedly being used to front-run prices for same-day delivery. We’ve spoken to traders who claim this is an open secret worth millions of euros. Listen to a discussion with the reporter who broke the story.

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guest: Nathan Witkop, Editor Clean Energy Desk, Montel

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly podcast, bringing Energy Matters in an informal setting. In today's pod, we discuss allegations of insider trading in Germany's balancing power market. This market. Irons out disparities between su supply and demand and ensures the stability of the power system avoiding outages or blackouts. Companies active on this market make money by offering to generate electricity on times of short supply or reduce output or consumption when there is a scarcity. But some companies and traders, it is alleged, have made millions acting on information that has not been made public. Or the publication of which is delayed. Joining me, Richard Sverrisson is Nathan Witkop, the editor of Montel's Green Team, who has written on the issue. A warm welcome to you, Nathan.

Nathan Witkop, Editor Clean Energy Desk, Montel: 1:03

Hi Richard. Thanks for having me.

Richard Sverrisson, Editor-in-Chief, Montel: 1:05

Now before we discuss the issue and potential insider trading I think it's important to provide some of the background here.'cause this is about the balancing power market, which is, it's very complex. What role does it play in keeping the lights on?

Nathan Witkop, Editor Clean Energy Desk, Montel: 1:22

As you alluded to in your introduction there, it's really what ensures that the electricity system is in balance at all times that supply and demand are harmonized. But that's because. Electricity, it's difficult to store and the electricity grids they need to be maintained at 50 hertz in Europe at all times. That is the indication that reflects that supply and demand are synchronized. And of course, supply can deviate or demand can deviate from forecasts. Think of a power plant tripping or. Think of renewable energy suddenly veering from its forecasts. Perhaps there's unexpected gusts of wind somewhere, or Yeah, everybody suddenly gets up in the middle of a football match because an ad break is called and they put the kettle on or something like that. These deviations need to be ironed out and it's grid operators who are responsible for maintaining the stability of the grid. They provide this balancing service. And the way they do that is to turn essentially to a market and this market, it's, there are relatively few companies that are able to provide the energy for this market that are qualified to, to provide energy in this market. They have to be able to respond at very short notice and yeah, at the shortest they need to be able to respond. 30 seconds notice, and then it's tiered in a way. You have these other reserves kicking in from five minutes notice, 12 and a half minutes notice, and they have to then provide energy or provide additional demand or a reduction in consumption for, up to 30 minutes or so to help. Iron out the system until, yeah, it can be ironed out. Essentially by the wholesaler electricity market where everyone else is trading electricity on a daily basis.

Richard Sverrisson, Editor-in-Chief, Montel: 3:28

Yeah, I think that's absolutely right where there are deviations in forecast or expectations. So maybe it'd be correct to say Nathan people not going and putting their cattle on would 'cause everyone's expecting people to do that halftime or at full-time. But but anyway, yeah, I absolutely right that these are very important markets to ensure system stability and that. Basically the lights stay on, and there are several different markets in terms of the timeframe where they add the supply into the market. But what's the issue that you've looked at? Nathan?

Nathan Witkop, Editor Clean Energy Desk, Montel: 3:57

So the issue here is that the signal that grid operators provide to activate balancing energy. It's not publicly disclosed in Germany, and that's also the case in many European countries. Nor is the state of imbalance on the grid, and the signal then becomes incredibly valuable. It reflects the state of imbalance on the grid, and it gives you a very useful. Piece of information for the intraday power market where everybody else in the electricity market in Germany is trading electricity. So they could be trading electricity for the same day delivery for, a block of electricity at from

four till 5: 4:45

00 PM in the afternoon, or a 15 minute period later in the day. But this signal can tell you that there is real scarcity. Or oversupply in the system. And if you are privy to this signal, then you have a 15 minute headstart on the rest of the market basically, and that can tell you that you might be very interested. In now selling all electricity contracts for the rest of the day in the intraday market, or buying up all of the electricity contracts for the rest of the day in the intraday market because they are somehow mispriced, they're under or overvalued. And yeah, as I said, there's relatively few companies that are pre-qualified to participate in the balancing market. There's 30 to 40 companies that, that are qualified to participate in. Its various tiers. And if they receive this signal, then they are in a sense privy to inside information. And there is the accusation that companies are acting on this information or their trading desks are because it's often the same people who are trading intraday power, who are trading the balancing energy or are responsible for that within their company. And. There is the allegation out there that these trading desks are able to exploit this information at the cost of the rest of the intraday market. So in a sense, the inside trading is actually happening in the wholesale German power market. At the intraday level, it's making use of a signal that some are given in the balancing market.

Richard Sverrisson, Editor-in-Chief, Montel: 6:26

And this is, this information or these signals from the balancing market only made available to a select few companies. You said you mentioned 30 or 40 or something.

Nathan Witkop, Editor Clean Energy Desk, Montel: 6:36

That's right. The grid operators are responsible for ensuring that the system is in balance and they allow trading to occur down to as close as they can before they start to become concerned about energy security because they don't want everybody trading to the very. Last second. And so there's a cutoff. There's a natural cutoff where the markets, the intraday, the, the spot electricity markets for the day ahead. The intraday is for the same day. There's a cutoff point at which it's called gate closure at which you can't trade electricity anymore. You have to decide, okay, this is my best estimate of where supply and demand are going to fall tomorrow. Say I, I have a fleet of. Wind turbines or solar panels. I want to trade relatively close to delivery because forecasts have become better and better over the years, but the most accu accuracy you're going to have in terms of knowing exactly where supply and demand are gonna fall, is gonna be close to the last minute. So there is a lot of pressure to trade up until the last moment. On the other hand, the grid operators have some concern that they need a bit of a buffer. Time buffer. They don't want everybody making last minute decisions that could be significant for energy security. So they have gate closures that at the very latest go, you know, maybe five minutes before delivery, but it depends upon the zone. That's a very localized level. And then after that point, they're the ones who take over responsibility for energy security. They do that. By reaching out to these select few companies and providing them with the signals to activate their balancing energy and where it becomes interesting here, this is organized as a market and the companies that can provide this balancing energy, they have auctions to determine who gets to go when. A bit like the rest of the power market only it's. It's not in, in the rest of the wholesale power market. You have the, everyone gets the price of the marginal bidder in, in the balancing market you get payer's bid. So if you have multiple assets in the balancing market, then you have an opportunity to get a very good picture depending on which assets are getting used and which aren't. Of the state of imbalance in the market. So in a sense, the structure is set up so that, yeah, if you have a lot of participating units in the market, say some very expensive ones that are very rarely gonna get used, you know that when that does get used, there is a big imbalance on the grid. It's gonna have profound implications for the intraday market, and you've got a good insight into. How to bid that into the intraday market ahead of everyone else.

Richard Sverrisson, Editor-in-Chief, Montel: 9:31

Sounds very unfair in terms of what certainly gives a huge advantage and and and a massive financial bonus potentially for those people who have that information.

Nathan Witkop, Editor Clean Energy Desk, Montel: 9:41

So I only learned of this year, but people that I spoke to current and former traders who. Claim to have used this signal in this way. And they spoke of this essentially being an open secret that's been around for at least a decade, and I suppose it has become increasingly important because of the increasing importance of the intraday market in Germany because of the growing. Importance of renewable energy and the system becomes increasingly weather driven, which means we need to trade more and we need to balance more closer to delivery. And so because of the growing importance of the intraday market, there is perhaps a sense that something that might have been a nice little. Money spinner for some in the past, but could be overlooked in the interests of maintaining energy security and not shaking the apple cart too much. Some are being ripped off, all of us to, to some extent that everyone who's not an insider is by definition an outsider. It's the outsiders who are in a sense carrying the cost of this. It's a transfer of. Of welfare in a sense, from the outsiders to the insiders.

Richard Sverrisson, Editor-in-Chief, Montel: 11:19

Yeah, no, absolutely. I think, and you rightly point out that, these markets are gonna be, trading as close to real time as possible, as is possible for the system. So there are more and more. Companies market partism want to come and join the intraday market. You want to see the liquidity an increase in counterparties companies there to make it as liquid as possible. But if there is a feeling or a suspicion that some people are getting privy to information before others, I think. People may hold back. So I think what you uncovered in that story is very important. Have you got any kind of, I dunno, back of an envelope type of calculation here as in, in terms of what kind of monetary figure we're talking here.

Nathan Witkop, Editor Clean Energy Desk, Montel: 12:01

So trying to pin down a value of this alleged activity is difficult. I, I put this question to everybody I spoke to for this story I spoke to. Five traders or ex traders who were not prepared to go on record. And of course, the story also has many on the record statements from companies in the market. One of the traders who was not willing to go on record put the value of the alleged activity between 50 to a hundred million euros a year. Another said they would estimate. The alleged activity to be worth maybe 10 to 20% of the value of Germany's total balancing costs, which came to around a billion euros last year. And another trader said that you can't really quantify this. It's difficult to quantify because. The true value in a sense ripples through all intraday trades in the market following any significant balancing event. So the market's alleged to be being front run here by certain people in this situation. Those who are privy to the information and can and do trade on it they're then able to make money all day long in the intraday market. So it's hard to quantify, but in a sense, the allegation is it's an economic rent that's being extracted from the rest of the market and in effect all energy consumers.

Richard Sverrisson, Editor-in-Chief, Montel: 13:28

Nathan, what's the view from the authorities the regulator for ex, for example?

Nathan Witkop, Editor Clean Energy Desk, Montel: 13:32

The Federal Network Agency, the Bunes Net Sagon tour is the regulator that's responsible for. Monitoring this behavior and for ultimately for energy security. And so they told Montel, if companies have inside information, they must ensure this information is not used in trading decisions or that it is published before it is used in certain situations. Balancing activation signals may also constitute inside information. And the aforementioned rules, therefore also apply. So they did say that if this is happening, then it shouldn't. And they said that the rules there are EU rules by Acer is the governing body at the EU level, the punes net Sagan tour at the German level. They have specific rules about this with respect to the energy markets. And they say these rules would apply in this situation. But they also qualified this and you get a sense that they have to take other concerns, other interests into account. And here I'm thinking about the grid operators and they balance this against saying that in cases where market rules encourage manipulation, we are also contemplating adjusting them. However. All aspects that are important for the functioning of the energy supply must be considered. And this also includes, for example, ensuring system security. They also said that they had investigated situations that had been reported to them and had so far been unable to identify any breaches. So the regulator has formally, so far not. Found any instances where insider trading has happened,

Richard Sverrisson, Editor-in-Chief, Montel: 15:35

and you've also asked them for an interview on the matter.

Nathan Witkop, Editor Clean Energy Desk, Montel: 15:39

So the regulator declined to give an interview at the time of the story, but they did provide a written statement that I quoted from in the story. Since the story came out, I've been offered an interview with the regulator once. All the relevant people have returned there from summer vacation, and I do hope we can sit down with them soon to hear a more detailed account of their perspective, because obviously there are many questions that it would be interesting to hear their response to.

Richard Sverrisson, Editor-in-Chief, Montel: 16:10

I think that would be very important and very interesting to hear what they have to say. But, you say you, we published the story on Montel News just before the summer. What has been the reaction so far from people in the market?

Nathan Witkop, Editor Clean Energy Desk, Montel: 16:22

I think it's important to note that we reached out to the 30 or so companies that are qualified to provide this balancing energy. All denied any wrongdoing. Only one conceded its trading floor had access to the signal. They had various responses to my request for confirmation that this is the case that. Their trading flaws have access to this specific signal from the balancing market. Some said they were compliant because, for example, they kept their trading desks that handle balancing energy and that handle the intraday market separate. So they introduced an internal wall in effect. Others, there's one company that discloses. This signal, this information on the e X's transparency platform. So the European Energy Exchange has a transparency platform for disclosing market relevant information. They're the only company to disclose this specific signal there. And they said that they did this precisely because they feared it could constitute inside information. And others said, disclosing it in this fashion would always be inefficient. Less than ideal. Not the way to go about things, and they said it was really incumbent on grid operators to disclose the true balance of the system the imbalance of the system, and to disclose these signals and they pushed responsibility back in that direction. I did say it's been an open secret. It's worth noting that already in, in 2000, some of the complaints that Montel saw dated back to 2018, 19, I believe. So it has been flagged before this issue. In, in 2021, there was a study conducted by. The energy economist and consultant Leon Hitt he looked into this and tried to demonstrate statistically that these signals were being traded upon, that energy market prices in the intraday market were responding to these signals that, and he was saying with 99% confidence. This is being traded upon, has taken quite some time to get to the point where this is being talked about openly. Other concerns, of course we have our push towards greater integration of European power markets, greater integration of. Balancing systems and concerns about energy security because the grid operators have a legitimate concern that they don't want decisions that could be happening right at the last moment to collapse grins because they're unable to cope with the degree of. Of a adjustments that need to be made to to keep, to maintain energy security. I think yeah, it's there, there are many, or there, there are a few things to balance, there's the push for having a system that responds to the demands of renewable energy and the. The implications of a system built around weather driven sources of electricity versus having some degree of control still in the hands of those outside the market. The grid operators who make sure that the system doesn't collapse. There, there is some competing. There are some competing interests there. And in a sense at the moment that the opacity the lack of transparency in a way is a way of demarcating the point between where the intraday market trades and the point where the grid operators take over. And I think they have some concern. My impression, they have some concern that they open everything up. Then they lose control and perhaps they they risk the energy security for which they're responsible. And where are the costs there to society? There, there are huge costs there to society in any collapse of the grid.

Richard Sverrisson, Editor-in-Chief, Montel: 21:00

Absolutely. And the grid, we've come close to several major outages. There have been several cases over previous years as the. As the, as they become or the network becomes overloaded with renewable production. We have constraints cross border internal constraints in countries in Northern Europe as well as, curtailments, et cetera. So I think, there the, there is a limit to, to what the grid can take. And of course the concerns as you mentioned there, Nathan are fully justified in a way, you, the costs of a large scale outage or blackout on, on the Europe's power network could be far greater than the sums we we've been talking about.

Nathan Witkop, Editor Clean Energy Desk, Montel: 21:39

Yeah. And I think I gave Leoni help the last say in, in the story.'cause I thought he had a, he made a pithy point, which I think worked out to be a good quote where he said the question of whether countries, companies, sorry, not countries, whether companies should respond to imbalance in the first place is an ideological one. You either believe the market works or you believe the market doesn't work. But even if you don't like it, you shouldn't let some have access to the in info, this information and not others. And I think that really reflects the state of where we're at. It's problematic. The situation we're in it, it really needs to change, but there is also an ideological undercurrent to how. We integrate renewable energy and balance that against the need to maintain energy security.

Richard Sverrisson, Editor-in-Chief, Montel: 22:30

This is only gonna become more and more complex and pressing as we move into a greener, network society and we embrace the en energy transition fully and move towards net zero. So Nathan, brilliant work in terms of putting this story out and I hope you continue with your dogged investigation. And I'm sure we'd better read more on Montel News. So once again, Nathan, thank you very much.

Nathan Witkop, Editor Clean Energy Desk, Montel: 22:53

Thanks for having me on, Richard.