Whistleblowers sound insider trading alarm on German power

The allegations centre on the signals grid operators send to select companies qualified to provide balancing energy. Such energy keeps power lines stable by ironing out sudden deviations between supply and demand. This can happen when a power plant fails, or when solar or wind veers abruptly from forecasts. Few companies can provide balancing energy because they need to respond to requests for large volumes of electricity within seconds or minutes.

Grid operators’ signals to activate balancing energy are not publicly disclosed in real-time in Germany. Nor is the state of imbalance on the grid. Yet this information provides a lucrative insight into the imminent direction of the intraday market – where electricity for delivery the same day is traded.

Those aware their company is requested to provide balancing energy know the system faces a shortage. They have a head start of sometimes 30 minutes to buy up electricity before everyone else in the intraday market.

“It is extremely easy,” said one ex-trader turned executive with over a decade in the energy business. He learned the trick his first week on the job, he said. “This is the mother of all insider signals.”

The inside track
The signals are not just useful on the way up. They are just as useful on the way down because they also reveal when scarcity will subside. Especially if a company has multiple assets it can offer at various price points. The bids companies can offer grid operators for balancing energy can reach up to EUR 15,000/MWh.

A spike in power prices on Germany’s intraday market on 3 June illustrates the point. A sudden shortfall of solar relative to forecasts that day saw some 15-minute periods for delivery during the morning reach the intraday market’s ceiling of EUR 9,999/MWh. To get an idea of how expensive that is, daily power prices in Germany have only averaged around EUR 70/MWh so far this year. Those notified early via balancing signals knew scarcity on 3 June would decline sharply from midday. They could effectively front-run the market.

“Hourly intraday prices hit EUR 1,000/MWh that morning. If you then knew at some point around 10:07am or 10:08am that the imbalance price was no longer EUR 14,000/MWh but had fallen to EUR 200/MWh, then it might be an interesting idea to sell all [intraday] contracts for the rest of the day,” said Mirko Thoden, who heads trading for Flex Power, a Hamburg-based company. “The rest of the market would then realise half an hour later that the fair price was no longer EUR 1,000/MWh but EUR 100/MWh.” 

Montel has spoken to five active or former traders who claim to have exploited such information to make money this way. They described a practice that has been underway for at least 15 years. It was considered an open secret among those tasked with managing power at short notice, they said. One valued the scheme at EUR 50m-100m annually. Another estimated 10-20% of the value of Germany’s total balancing costs – which came to around EUR 1 billion last year – is creamed off in this fashion.

Others suggested the value was too difficult to quantify as it rippled through all trades in the intraday market in the wake of significant balancing decisions. Regulators had sat on multiple complaints for years and the German market was not the only one susceptible, they added.

“We have investigated situations that have been reported to us and have so far been unable to identify any breaches,” the relevant German regulator, the Federal Network Agency, told Montel in a statement.

Yet correspondence, seen by Montel, between one market participant and the regulator dating back to 2019 suggests the company’s complaint was ultimately ignored. The complaint pre-empted the findings of a study undertaken in 2021 by energy consultant Lion Hirth on behalf of energy traders BayWa r.e. Energy Trading, MVV, Quadra Energy, Sunnic Lighthouse and Trailstone.

Hirth’s analysis of balancing signals and subsequent price developments in the intraday market found “a consistent picture of robust correlations” that all but confirmed “market players use the information from balancing power requests for trading decisions”.

Disclosure obligations
Montel approached the roughly 30 companies pre-approved to provide balancing energy – including all the country’s biggest utilities. Only one disclosed whether its trading floor had access to these signals. Others cited business confidentiality reasons for refraining to respond.

Bavarian energy provider LEW operated its intraday and balancing activities separately, it said. “As such, we comply with all legal and regulatory requirements.”

Most insisted they acted lawfully. “It goes without saying that we at RWE comply with all market regulations and also take appropriate organisational measures to ensure this,” said a spokeswoman for Germany’s biggest power producer.

Mannheim-based utility MVV is so far the only company to disclose such information in regular updates posted on an ad hoc ticker of the transparency platform of the European Energy Exchange. “We see a risk the information could be considered inside information,” said spokesman Sebastian Ackermann.

“It is theoretically possible to erect appropriate walls to prevent the exploitation of inside information. However, it is questionable whether communication within companies would not still be possible, despite such walls.”

Companies’ disclosure of the balancing signals they receive would always be deficient, said BayWa r.e, which backed Hirth’s 2021 study. Reporting obligations should be directed towards grid operators, it added. 

“We have a relatively clear position,” said the company’s head of trading Juergen Grohmann. “Grid operators should publish the status of imbalance on the grid and the status of the balancing activation signals with prices in real time.”

The Federal Network Agency declined a request for an interview on this subject. As did the European energy regulator, Acer. Both guided Montel to their respective non-binding guidelines on energy market transparency.

“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,” the German regulator told Montel by email. “In certain situations, balancing activation signals may also constitute inside information and the aforementioned rules therefore also apply.”

Acer’s so-called Remit rules specifically cite grid operator requests to activate balancing reserves as potential inside information that must be disclosed.

Yet the guidelines also contain a grey zone when it comes to energy security – something close to the hearts of the grid operators who ultimately preserve it. Germany’s four grid operators – Tennet, Amprion, TransnetBW and 50Hertz – affirmed their compliance with Remit rules and their willingness to go beyond regulatory requirements to facilitate greater transparency. But they also highlighted their reservations.

“Future developments also require a careful analysis of the extent to which additional information could be misinterpreted by market participants, which could lead to false incentives and jeopardise system security,” they said in an emailed statement. 

Grid operators were fundamentally willing to publish information more swiftly – but they were not ready for “a world of real-time reporting”, said an employee – on background – involved in balancing at one of the companies.

Energy security concerns
Germany’s transition to renewables has fanned increasing pressure to permit trading to occur with ever-shorter lead times. This helps the market correctly anticipate production as weather forecasts approach delivery.

At some point, however, those responsible for energy security want the market to settle on its best guess of where supply and demand will fall. Gate closures for trading demarcate this point. At their sharpest, most localised level, they occur five minutes before delivery. Traders must balance their production schedules by then or risk fines. Grid operators net out imbalances on the network with balancing energy thereafter. Opacity around what happens after gate closure is one way to enforce the demarcation. 

The Federal Network Agency also hinted at energy security concerns in its response to Montel.

“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… This also includes, for example, ensuring system security.”

Hirth – whose study has been flagged by those seeking to bring allegations of insider trading to the attention of authorities – acknowledged to Montel the legitimate concerns for energy security that regulators and grid operators have when they consider whether to allow trading to take place down to the very last minute. But the current situation was also a problem, he said.

“The question of whether companies should respond to imbalances in the first place is an ideological question. 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 this information, and not others.”