Detection of Artificial Scarcity Creation in Electricity Trading

1. Introduction

Artificial scarcity creation occurs when a market participant deliberately makes electricity appear more scarce than it really is, or creates conditions that make available supply look lower than the true market position. The purpose may be to increase electricity prices or obtain higher balancing-market revenues.

For example, a generator may have the ability to produce electricity but deliberately provide misleading information about its availability. If the system operator believes that supply is tighter than it actually is, it may need to buy electricity at a higher price.

This is important because electricity cannot easily be stored in large quantities across the whole system, and supply and demand must remain balanced almost continuously.

UK regulators mainly address this behaviour through REMIT market-manipulation rules, electricity licence conditions, market monitoring and competition law. Ofgem has specifically investigated conduct involving misleading information about generation availability and capabilities. (Ofgem)

2. Meaning of Artificial Scarcity

Artificial scarcity is different from genuine scarcity.

Genuine scarcity

There may genuinely be insufficient generation because of:

unexpected plant failures;

low wind or solar output;

transmission constraints;

fuel shortages;

unusually high demand; or

other technical problems.

Artificial scarcity

Artificial scarcity occurs when a participant creates or exaggerates the appearance of scarcity through its conduct.

Examples can include:

withholding available generation;

submitting false availability information;

exaggerating technical limitations;

submitting misleading physical notifications;

using non-genuine bids or offers;

manipulating balancing-market information; or

deliberately creating false signals about supply.

The legal question is therefore not simply whether prices increased. The regulator must examine why the scarcity occurred and whether the participant's conduct manipulated the market.

3. REMIT as the Main Legal Framework

The principal legal framework is REMIT — the Regulation on Wholesale Energy Market Integrity and Transparency.

REMIT prohibits both actual and attempted market manipulation in wholesale energy markets. ACER explains that prohibited manipulation includes conduct that gives false or misleading signals about supply, demand or price, or secures or attempts to secure an artificial price level. (ACER)

In Great Britain, Ofgem monitors and investigates wholesale electricity-market conduct.

Therefore, artificial scarcity can potentially become a REMIT market-manipulation investigation.

4. Detection Through Market Data

Detection normally begins with market surveillance.

Regulators can compare:

generation availability;

physical notifications;

submitted bids and offers;

actual generation;

technical operating parameters;

electricity prices;

balancing-market transactions;

weather conditions;

demand levels; and

communications or other evidence where legally available.

Ofgem has stated that its market-monitoring team uses alerts and case reviews to identify potential REMIT breaches. It has also investigated market manipulation and the accuracy of information supplied by electricity generators. (Ofgem)

A useful principle is:

Expected availability → reported availability → actual availability → market price → financial benefit

If these elements do not reasonably match, the conduct may deserve investigation.

5. Withholding of Generation Capacity

One of the most important forms of potential artificial scarcity is capacity withholding.

Suppose a generator has 500 MW available but makes only 300 MW available to the market during a period of high demand.

This does not automatically prove market manipulation. There may be legitimate technical, contractual or operational reasons.

However, regulators may examine:

whether the remaining capacity was technically available;

whether the generator had a genuine reason for withholding it;

whether the conduct changed the market outcome;

whether prices increased;

whether the generator benefited financially; and

whether similar conduct occurred repeatedly.

Therefore, withholding alone is not necessarily unlawful, but intentional withholding designed to manipulate market prices can be.

6. Balancing Mechanism Manipulation

The Balancing Mechanism is particularly important because the system operator uses it to balance electricity supply and demand close to real time.

This creates opportunities for manipulation if a generator falsely communicates its expected availability.

The leading UK enforcement example is InterGen.

7. Case Study: InterGen (2020)

In Ofgem's InterGen enforcement decision, Ofgem found that InterGen breached Article 5 of REMIT on four days in October and November 2016. The conduct involved misleading Physical Notifications and inaccurate information concerning the operating characteristics of several power stations. (Ofgem)

InterGen's notifications suggested that its power stations would not generate during certain high-demand periods known as “Darkness Peaks.”

The information contributed to the appearance of tighter electricity supply.

InterGen then submitted revised information indicating that the plants would generate during those periods. Ofgem found that the strategy was used to induce the system operator to pay the plants to generate and thereby obtain higher revenues through the Balancing Mechanism. (Ofgem)

Ofgem imposed payments amounting to £37.2 million after settlement discount, following an investigation that found profits of about £12.8 million from the manipulation. (Ofgem)

Relevance

This is a very important example of how false information about electricity availability can create an artificial impression of scarcity and generate higher balancing-market prices or payments.

8. Case Study: EDF Energy Thermal Generation

Another important example is EDF Energy (Thermal Generation) Ltd.

Ofgem found that between September 2017 and March 2020, EDF ETG repeatedly submitted technical information that did not correctly reflect the true capabilities of its West Burton B generating plant.

In particular, it frequently inflated the Stable Export Limit (SEL) reported for the plant. Ofgem found that this resulted in the ESO purchasing more energy from the plant than was needed in certain balancing situations. (Ofgem)

Ofgem found breaches of both:

electricity generation licence obligations; and

Article 5 REMIT market-manipulation rules.

EDF ETG agreed to make a £6 million voluntary payment. (Ofgem)

Importance

The case demonstrates that regulators do not examine only electricity prices. They can examine technical data supplied by generators and compare it with the actual capabilities of the plant.

9. Case Study: SSE and Availability Information

In 2020, Ofgem fined SSE £2.06 million for failing to publish information about the future availability of generation capacity in a timely manner.

Ofgem considered the information capable of having a significant effect on forward wholesale electricity prices. The breach concerned REMIT's requirements concerning inside information. (Ofgem)

This is important for artificial scarcity because information about whether a large generator will be available can materially change market participants' understanding of supply.

Thus:

Non-disclosure of important availability information → distorted market information → potentially distorted price formation.

10. Order-Based Detection

Artificial scarcity can also be detected through trading orders.

Regulators may look for:

unusually large orders;

cancellation of orders;

repeated changes in bids;

orders placed without genuine trading interest;

unusual price movements; and

transactions inconsistent with normal trading behaviour.

ACER has specifically identified layering and spoofing as potential REMIT manipulation. Non-genuine orders can create misleading impressions about supply, demand or price in electricity and gas markets. (ACER)

This is particularly important in electronic electricity markets.

11. Statistical and Technical Detection

Modern detection increasingly uses data analysis.

A regulator may construct a pattern such as:

Generator availability ↓

Market supply ↓

Electricity price ↑

Generator balancing revenue ↑

If this pattern repeatedly appears around the same participant's actions, it may justify deeper investigation.

However, correlation alone is not enough. Regulators must distinguish manipulation from legitimate responses to changing electricity-system conditions.

For example, a generator may genuinely become unavailable because of an unexpected technical failure.

12. Intent and Evidence

Evidence of artificial scarcity may include:

Trading records

These show what bids and offers were submitted.

Physical notifications

These show what the generator told the system operator it expected to produce.

Technical data

This helps determine whether reported operating limitations were genuine.

Communications

Internal communications may reveal the purpose behind particular trading decisions, where lawfully obtained.

Financial records

These can show whether the participant obtained an unusual benefit.

Repeated conduct

A single unusual event may have an innocent explanation. Repeated similar conduct can provide stronger evidence requiring investigation.

13. Competition Law

Artificial scarcity can also raise issues under competition law, particularly where a dominant electricity company deliberately restricts supply to increase prices.

The Competition Act 1998 prohibits abuse of a dominant position.

Possible concerns include:

deliberate supply restriction;

exclusionary conduct;

exploitative pricing;

strategic withholding; and

manipulation of access to essential market inputs.

Ofgem has enforcement powers for wholesale energy-market manipulation, while competition issues can also involve the CMA. Ofgem confirms that it can impose penalties for competition-law infringements and for REMIT breaches. (Ofgem)

14. Case Law and Regulatory Decisions

A useful point for academic research is that the strongest UK examples of electricity-market manipulation are often regulatory enforcement decisions rather than reported court judgments.

The InterGen and EDF ETG decisions are particularly useful because they demonstrate the actual evidence regulators use to identify manipulation of generation availability and balancing-market signals. (Ofgem)

The wider REMIT framework also contains numerous enforcement decisions across European energy markets. ACER maintains an official database of REMIT enforcement decisions involving market manipulation and insider trading. (ACER)

15. Legal Consequences

Where artificial scarcity is established, consequences can include:

Financial penalties

Recovery or confiscation of unlawful profits

Licence-related enforcement

Compliance requirements

Changes to internal controls

Reputational consequences

Potential criminal consequences in appropriate cases

Ofgem states that its REMIT enforcement powers include significant financial penalties and, under the current UK framework, criminal enforcement powers for certain wholesale-market abuses. (Ofgem)

16. Conclusion

Detection of artificial scarcity creation in electricity trading is mainly a process of identifying whether apparently tight electricity supply has been caused by genuine system conditions or deliberately distorted conduct.

The legal framework combines REMIT, electricity licence conditions, market monitoring and competition law.

The most important UK examples are InterGen and EDF Energy Thermal Generation. InterGen used misleading physical notifications to create an inaccurate picture of generation availability around high-demand periods, while EDF ETG supplied inaccurate technical information concerning its generation capability. Both cases resulted in regulatory action. (Ofgem)

The detection process therefore involves comparing actual plant capability, reported availability, trading behaviour, system conditions, price movements and financial outcomes.

For PhD-level energy law, the key principle is that electricity-market scarcity is legitimate when it results from real supply-and-demand conditions, but it becomes a regulatory concern when a participant deliberately creates or exaggerates scarcity through false information, non-genuine trading, capacity withholding or other manipulative conduct designed to distort price formation.