Detection of Distorted Price Signals in Markets

1. Introduction

Distorted price signals arise when electricity or other energy-market prices do not properly reflect genuine market conditions of supply, demand, costs and availability.

In a competitive electricity market, prices should normally provide information about scarcity and demand. For example, if electricity supply genuinely falls while demand remains high, prices may legitimately increase.

The legal problem arises when a trader or generator creates a false or misleading impression about supply, demand or price. Such conduct can make the market price move away from the level that would have resulted from genuine competition.

Under the EU REMIT framework, market manipulation includes conduct that gives false or misleading signals or secures, or attempts to secure, a wholesale energy price at an artificial level. (ACER)

2. Meaning of a Distorted Price Signal

A price signal is distorted when the information communicated through market prices is unreliable.

For example:

Genuine shortage → price rises naturally

but:

False outage information → market believes supply is lower → price rises artificially

The second situation can constitute market manipulation.

Distortion can occur through:

false information;

misleading trading orders;

capacity withholding;

wash trades;

spoofing and layering;

transmission-capacity hoarding;

misleading generation notifications; or

manipulation of balancing-market information.

3. Why Electricity Markets Are Sensitive

Electricity markets are particularly vulnerable because electricity supply and demand must be balanced almost continuously.

A relatively small change in available generation can sometimes produce a significant price change, especially during periods of high demand.

Therefore, regulators must examine whether a price movement resulted from:

genuine scarcity;

weather;

fuel prices;

network congestion;

generator outages;

demand changes; or

potentially manipulative behaviour.

A high price alone is not evidence of manipulation. ACER has emphasised that regulators must consider the actual market circumstances and that suspicious indicators are not automatically proof of unlawful conduct. (ACER)

4. Legal Framework: REMIT

The principal EU framework is the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).

REMIT prohibits:

insider trading;

market manipulation;

attempted market manipulation; and

dissemination of misleading information.

The revised REMIT framework also covers newer areas including electricity balancing markets, storage and algorithmic trading. (ACER)

The purpose is to ensure that wholesale energy prices reflect a fair and competitive interaction between supply and demand. (ACER)

5. False or Misleading Information

One common method of distorting prices is providing inaccurate information to the market.

Information concerning:

plant availability;

outages;

expected generation;

demand;

transmission capacity; or

operational conditions

can influence trading decisions.

If deliberately false information causes other market participants to change their trading behaviour, the resulting price may no longer reflect genuine conditions.

Ofgem currently emphasises the importance of timely publication of inside information, including information about outages and availability. In 2026, it warned that simple fixed thresholds may fail to capture the combined effect of several smaller outages. (Ofgem)

6. Case: National Grid Electricity Transmission

An important UK enforcement example concerns National Grid Electricity Transmission plc (NGET).

Ofgem investigated NGET after incorrect De-Rated Margin (DRM) calculations were published during 2015–2016.

The incorrect information created false or misleading signals concerning the supply, demand or price of wholesale energy products, leading Ofgem to investigate the conduct under Article 5 of REMIT. (Ofgem)

Relevance

This case shows that distorted price signals do not necessarily require a trader to manipulate the price directly.

Incorrect information about system conditions can itself distort market expectations and therefore prices.

7. Case: InterGen

A particularly important UK enforcement case is the InterGen REMIT case.

Ofgem found that InterGen companies submitted misleading Physical Notifications concerning the expected operation of power stations.

The notifications indicated that the plants would not generate during certain high-demand periods, even though the companies had contractual positions requiring them to supply electricity.

Ofgem found that the misleading notifications were intended to influence the Balancing Mechanism and obtain additional revenues. (Ofgem)

The companies were also found to have submitted misleading information about their Stable Export Limits.

Relevance

This case demonstrates how operational information can become a tool for manipulating market outcomes.

It is especially important for understanding modern electricity markets because the system operator relies on accurate information from generators.

8. Economic Withholding

A generator may also distort price signals through economic withholding.

Suppose a generator can produce electricity at a reasonable marginal cost but submits an extremely high bid.

If the bid is not accepted, the market may appear to have less available supply.

If this conduct is deliberately used to influence market prices, it can raise market-manipulation concerns.

However, a high bid is not automatically unlawful.

The regulator must consider:

actual costs;

opportunity costs;

technical restrictions;

market conditions;

contractual obligations;

the participant's market position; and

the purpose and likely effect of the conduct.

ACER's guidance specifically warns that suspicious indicators must be assessed using judgment because transactions that appear unusual can still be legitimate. (ACER)

9. Spoofing and Layering

Digital electricity trading creates another form of distorted price signals: spoofing and layering.

A trader may place large orders that it does not genuinely intend to execute.

These orders can make the market appear to have:

greater demand; or

greater supply

than actually exists.

Other traders may react to this artificial information.

ACER explains that layering and spoofing can create false or misleading signals concerning supply, demand or price and may cause prices to settle at artificial levels. (ACER)

This is particularly important in automated and high-speed trading.

10. Detecting Distorted Price Signals

Regulators use several methods.

A. Price analysis

They examine unusual price movements and compare them with normal market conditions.

B. Volume analysis

Large or unusual trading volumes can be a warning signal.

C. Order-book analysis

Regulators examine how orders were submitted, changed and cancelled.

D. Physical information

Trading data can be compared with:

actual generation;

outages;

network conditions; and

available capacity.

E. Financial position

Investigators can examine whether the participant financially benefited from the price movement.

F. Cross-market analysis

A trader may manipulate one market to benefit from another, so regulators may examine connected electricity, gas and financial markets.

ACER currently uses automated alerts followed by analyst review to detect suspicious wholesale-energy behaviour. (ACER)

11. Market Data and Surveillance

Modern surveillance depends heavily on large amounts of data.

REMIT transaction reporting allows regulators to monitor:

orders;

transactions;

prices;

volumes;

delivery periods;

market participants; and

related wholesale energy products.

ACER states that transaction reporting is designed to help detect and prevent insider trading and market manipulation. (ACER)

The important principle is:

data identifies suspicious behaviour, but human and legal analysis determines whether the behaviour actually constitutes a breach.

12. Difference Between Volatility and Manipulation

This distinction is very important.

Legitimate volatility

Prices may change because of:

extreme weather;

fuel-price changes;

unexpected outages;

renewable generation fluctuations;

high demand; or

transmission constraints.

Manipulative distortion

The price may be distorted because someone:

submits false information;

creates artificial scarcity;

uses fictitious orders;

manipulates capacity;

conducts wash trades; or

deliberately creates misleading market signals.

Therefore:

Unusual price ≠ automatically unlawful price.

13. Case: Engie Global Markets

In Engie Global Markets, Ofgem found a breach of Article 5 of REMIT involving transactions and orders in the wholesale gas market that gave, or were likely to give, false or misleading signals concerning supply, demand or price, or secured the price at an artificial level.

Ofgem imposed a penalty that was reduced following the company's admission and early settlement. (Ofgem)

Relevance

Although the case concerned gas rather than electricity, it is useful because the same REMIT market-manipulation principles apply across wholesale energy markets.

14. Cross-Border Distortion

Modern electricity markets are interconnected.

A distorted signal in one country can influence prices in another through:

interconnectors;

coupled markets;

cross-border trading; and

transmission capacity.

The revised REMIT framework gives ACER an enhanced role in cross-border investigations, while national regulators continue to perform important enforcement functions. (ACER)

This is important because a purely national investigation may not reveal the complete trading strategy.

15. Role of Artificial Intelligence

Future electricity markets will increasingly use algorithms.

AI can help regulators identify:

unusual price movements;

abnormal bidding;

repeated order cancellations;

suspicious trading patterns;

coordinated behaviour; and

unusual relationships between physical and financial positions.

However, automated detection should be treated as an investigative warning, not automatic proof of wrongdoing.

Human investigators must examine the economic and operational context.

16. Importance of Market Transparency

Transparent markets reduce opportunities for manipulation.

Participants should have reliable information about:

generation availability;

outages;

network conditions;

market rules;

trading information; and

relevant system constraints.

Transparency allows market participants to make decisions based on genuine information rather than rumours or artificial signals.

17. Remedies

When distorted price signals are found to result from unlawful conduct, regulators may use:

financial penalties;

compliance directions;

remedial measures;

enforcement undertakings;

market-monitoring requirements; and

other statutory powers.

The objective is both deterrence and protection of market integrity.

18. Conclusion

Detection of distorted price signals is essential for maintaining a fair electricity market.

The basic legal question is:

Does the market price reflect genuine supply and demand, or has someone deliberately created a misleading signal?

The main detection methods include:

analysing price movements;

examining trading volumes;

monitoring order books;

comparing market information with physical electricity conditions;

checking generator availability;

analysing balancing-market behaviour;

examining financial positions;

detecting spoofing and layering;

monitoring cross-border transactions; and

using automated surveillance followed by human investigation.

The NGET case demonstrates how inaccurate system information can produce false market signals, while InterGen shows how misleading generation notifications can be used to influence the Balancing Mechanism. (Ofgem)

In simple words, a distorted price signal occurs when the electricity price is influenced by false, misleading or artificial information rather than genuine market conditions. Modern market surveillance therefore compares trading data with real electricity-system conditions to identify possible manipulation while recognising that unusual prices can also arise from legitimate scarcity or volatility.