On March 14, 2023, the European Commission (“Commission”) published its legislative proposals to reform the EU electricity market in a two-fold way:

• by amending Regulation (EU) No 1227/2011 of the European Parliament and of the Council (REMIT) to enhance the toolbox available to monitor and enforce market integrity and transparency (“REMIT Proposal”), and

• by amending the Regulation (EU) 2019/943 (Electricity Regulation) and Directives Nos (EU) 2018/2001 (RED II) and (EU) 2019/944 (Electricity Directive) to reform the electricity market design rules.

Rationale behind the amendment of REMIT

Since the summer of 2021, Europe has endured volatile and record high energy prices, exacerbated by Russia’s invasion of Ukraine and the Covid-19 recovery. The EU energy market reforms aim to address the shortcomings revealed by the energy crisis and maximise the benefits of renewables.

REMIT lays down the framework for monitoring wholesale energy markets and prohibits abuses such as insider trading and market manipulation. The Commission’s REMIT Proposal notes that the energy crisis highlighted inadequacies in the existing market design, including the need for more robust monitoring to better protect against market abuse. The REMIT Proposal therefore seeks to bring substantive changes to the REMIT framework and expand the role of the EU Agency for the Cooperation of Energy Regulators (“ACER”) in its enforcement.

Market manipulation and inside information

Due to the increasingly close interaction between financial and energy markets, the Commission proposes that the REMIT framework should be better aligned with financial market legislation. The REMIT Proposal therefore adjusts the definition of ‘market manipulation’ and ‘inside information’ in the REMIT Regulation to mirror those in Regulation (EU) No 596/2014 on market abuse (“MAR”).

Market manipulation

This alignment exercise brings several amendments to the definition of “market manipulation” and the related prohibition. A few that stand out are:

1. Manipulation of benchmarks – the import from MAR of manipulation of benchmarks, which would now fall within the definition of market manipulation under REMIT. Specifically, market manipulation will now include providing false or misleading information in relation to a benchmark, where the person either knew or should have known that the information was false or misleading, as well as engaging in any other behaviour which leads to the manipulation of the calculation of a benchmark.
2. Individuals within scope – individuals can now also be held to account in relation to market manipulation. The definition of market manipulation has been updated to state that market manipulation may designate the conduct of a legal person but also, of the natural persons who participate in the decision to carry out activities for the account of the legal person concerned.
3. “Any other behavior” catch-all – market manipulation currently focuses on transactions and orders to trade, and this is perceived as preventing REMIT from capturing other behaviors which do not involve orders or transactions on the market. The Commission therefore proposes to include a catch-all phrase (ie “or any other behavior”) into the definition to capture a wider range of market manipulation devices.

Inside information

Likewise, the inside information regime is amended as follows, noting that some of these matters are already considered best practice under ACER’s REMIT Guidance but are now being placed on a formal legislative footing:

1. Pending orders & intermediate steps – the amended definition of inside information would include: (i) information conveyed by a client (or by persons action on a client’s behalf) relating to the client’s pending orders; and (ii) information relating to a protracted process as well as intermediate steps in that process.
2. Reasonable investor test – the amended definition of inside information clarifies that information which would be likely to significantly affect prices of wholesale energy products will mean information that a reasonable investor would be likely to use as part of the basis for investment decisions.
3. Cancelling or amending orders to trade – the prohibition on insider trading is proposed to also apply to the use of inside information by cancelling or amending an order to trade in wholesale energy products.
4. Inside Information Platforms mandatory – the inside information disclosure obligation is proposed to be amended such that it would become mandatory for market participants to disclose inside information through authorized Inside Information Platforms (“IIPs”) registered with ACER. New requirements for IIPs will apply to ensure that the inside information is made public in a manner which enables fast access and complete assessment of the information by the public.

Wholesale energy products definition

The REMIT Proposal seeks to amend the definition of ‘wholesale energy products’ (and thus expand the scope of REMIT) by adding contracts for the supply of electricity or natural gas which “may result” in delivery in the EU. At present, the definition refers solely to products where delivery “is” in the EU.

The Commission explains in the preamble of the proposed regulation that this amendment is necessary because third countries may participate in the EU single day-ahead and intraday coupling in the electricity sector. This possibility may mean that orders to trade placed in third countries could potentially result in a contract for the supply of electricity with delivery in the EU, which are captured by REMIT. ACER has dealt extensively in its Guidance with what constitutes “delivery in the EU” especially in relation to contracts for the delivery of LNG at LNG terminals. This amendment to the definition of ‘wholesale energy product’ may prompt new questions from market participants asking ACER to clarify what ‘may result in delivery’ means in this context.

Additional reporting obligations

To enhance the data reporting and market monitoring regime, the Commission introduces a series of new requirements including the following:

1. OMP order books – organised marketplaces will be required to make their full order book data set available to ACER.
2. RRMs mandatory for data reporting – market participants will be required to provide transaction and/or fundamental data through registered reporting mechanisms (“RRMs”). RRMs will be persons authorised by and registered with ACER to provide details of transactions, including orders to trade, and fundamental data to ACER on behalf of market participants.
3. PPAETs – the proposal introduces a new “persons professionally arranging and executing transactions” (“PPAETs”) category, replacing the existing category of persons professionally arranging transactions. PPAET’s would be obligated to report suspicious transactions in breach of the insider trading and market manipulation prohibitions and potential breaches of the obligation to publish inside information.

Cross-border cases and ACER’s enhanced investigative powers

In addition to enhanced information provision provisions, the amendments are also intended to improve enforcement and information sharing capabilities between ACER, relevant national authorities and the Commission.

ACER is proposed to have a stronger role in investigations of significant cross-border cases. The Commission finds that market abuse behaviors are increasingly cross-border in nature and enforcement action in these circumstances can present jurisdictional and practical challenges. Therefore, the Commission proposes that ACER should carry out cross-border investigations in cooperation with the national regulatory authorities for the purpose of supporting and complementing their enforcement activities.

ACER would be able to carry out investigations directly by conducting on-site inspections and by issuing requests for information to the relevant persons under investigation. However, despite ACER’s additional investigative powers, there remains a strong emphasis on cooperation between ACER and the national regulatory authorities. Specifically, ACER would not be able to issue fines or penalties directly but would instead issue a report on the outcome of its investigation to the relevant national authorities and require those authorities to take enforcement action.

Delegation of tasks and responsibilities between national regulatory authorities would still be allowed through delegation agreements. However, Member States may set out specific conditions and limit the scope for the delegation to what is necessary for the effective supervision of cross-border market participants. ACER must be informed of delegation agreements and can provide an opinion.

Harmonisation of fines

The REMIT Proposal also sets out the framework for the harmonisation of sanctions and measures for breaches of REMIT at national level, providing the following as a minimum:

1. Prescribed types of sanctions/measures – national authorities must have the ability to: (i) require the person to bring the breach to an end; (ii) disgorge profits gained or losses avoided due to the breach; (iii) issue public warnings or notices; and (iv) impose one-off or periodic financial penalties.
2. Minimum financial penalties for legal persons – subject to a total cap of 20% of the annual turnover in the preceding business year, the following minimum penalties are required:
   • for breaches of the insider dealing and market manipulation prohibitions, 15% of total turnover in the preceding year;
   • for breaches of the obligation to disclose inside information and relating to PPAETs, 2% of total turnover in the preceding year; and
   • for breaches of the data reporting and registration obligations, 1% of total turnover in the preceding year.
3. Minimum financial penalties for natural persons (ie individuals) – subject to a cap of 20% of the yearly income in the preceding year, the following minimum penalties are required:
   • for breaches of the insider dealing and market manipulation prohibitions, €5,000,000 ($5,491,350);
   • for breaches of the obligation to disclose inside information and relating to PPAETs, €1,000,000 ($1,098,270); and
   • for breaches of the data reporting and registration obligations, €500,000 ($549,135).

Algorithmic trading

The use of trading technology has evolved significantly in the past decade and is increasingly used on wholesale energy markets. Many market participants use algorithmic trading and high frequency algorithmic techniques with minimal or no human intervention.

Under the REMIT Proposal, market participants that engage in algorithmic trading must have effective systems and suitable risk controls in place to ensure that their trading systems have sufficient capacity, are subject to appropriate trading thresholds and limits, and prevent the sending of erroneous orders to trade or creating or contributing to a disorderly market. The market participant must also have effective business continuity arrangements to deal with any failure of its trading systems and ensure its systems are fully tested and properly monitored.

There would also be requirements to notify ACER and the relevant national regulatory authority of engagement in algorithmic trading and to keep adequate records which may be monitored by national regulatory authorities. Notification is also required if a market participant provides direct electronic access to an organised marketplace.

Third country market participant registration requirement

Of particular relevance to UK market participants since Brexit, it is now proposed that market participants resident or established in a third country must declare an office in an EU Member State in which they are active and register with the national regulatory authority of that Member State.

Comment

The Commission recognises that the REMIT Proposal increases reporting obligations for market participants and widens the scope of REMIT, but argues that the higher burden is proportionate relative to the gains in improved transparency, monitoring and enforcement capabilities particularly given increasingly frequent cross-border breaches. It remains to be seen, however, whether there will also be a corresponding increased effort in helping market participants understand how best to ensure compliance. For instance, the proposed mandatory use of (ACER-authorised) platforms for data reporting and inside information disclosures is already largely the status-quo and does not alleviate the greater issue for market participants, which is knowing what needs to be reported/disclosed and when.

From a GB perspective, there remains the issue of market participants having to comply with two parallel, and now potentially diverging, regimes (ie the GB retained law REMIT, and EU REMIT). In GB, Ofgem has suspended transaction/data reporting for the time being and has otherwise stated that it will continue to follow ACER’s guidance when enforcing breaches under the GB REMIT regime. But increasing divergence between the EU and GB regimes will mean that UK market participants and regulators will find it more difficult to adopt a consistent approach in ensuring compliance.

Similarly, there is also now the issue that activities performed in third countries (such as the UK) may fall within the scope of REMIT, particularly where delivery may occur in the EU. Absent further specific guidance, third country market participants will need to carefully assess the extent to which the various obligations and prohibitions under EU REMIT will also apply to them when trading in within-scope wholesale energy products. It is perhaps telling in this respect that the registration obligation now expressly provides how third country participants should register if they are established outside the EU. 

In times of political, economic, and social turbulence, it is of course necessary for policymakers to ensure that consumers retain confidence in energy markets, and it is encouraging to see that the EU is alive to new cross-border abusive practices and the need to harmonise enforcement. However, achieving the objective of improving the quality of monitoring and enforcement is a two-way street, and market participants have long sought greater certainty and clarity regarding their obligations. It will therefore be interesting to see whether the Commission and ACER redouble their efforts in ensuring a common understanding of REMIT across the industry.

Next steps

The proposal will be adopted through the ordinary legislative procedure and therefore will now be subject to legislative review by the European Parliament and the Council before entering into force. This is likely to take approximately 12-months, during which further amendments could be proposed.