FORWARD CURVE DISTORTION IN ENERGY TRADING SYSTEMS

1. Meaning and Concept

A forward curve represents the market prices at which electricity, gas, or other energy commodities can be bought or sold for delivery at different future dates. It is fundamental to hedging, investment planning, risk management, valuation, and price discovery. Forward curve distortion occurs when prices along that curve cease to reflect a fair interaction of expected supply, demand, storage, transmission constraints, fuel costs, weather expectations, and other legitimate market fundamentals.

Distortion is not automatically unlawful. Energy forward curves can change sharply because of genuine scarcity, geopolitical events, outages, congestion, changing demand, or renewable-generation forecasts. Legal concern arises where trading conduct, orders, capacity strategies, false information, or misuse of inside information creates false or misleading price signals or moves prices toward an artificial level.

2. How Forward Curves Can Be Distorted

Forward curve distortion may result from spoofing, layering, wash trades, capacity hoarding, market cornering, misleading information, marking settlement prices, or cross-product manipulation. For example, a trader holding a large derivatives position might trade aggressively in a related physical electricity or gas product to influence the reference price used for valuing the derivative.

ACER guidance specifically recognises cross-product manipulation, including trading an underlying wholesale energy product to distort a related derivative price. It also identifies conduct around closing, settlement, expiry, or valuation points as potentially manipulative where undertaken to move a reference price.

Such distortion is particularly serious because forward prices influence power-purchase agreements, collateral requirements, generators' hedging strategies, retail tariffs and investment decisions.

3. Regulatory Framework

Within the European wholesale energy market, REMIT—Regulation (EU) No 1227/2011— prohibits actual and attempted market manipulation. The framework targets conduct producing false or misleading signals concerning the supply, demand or price of wholesale energy products and conduct securing, or likely to secure, prices at artificial levels.

The revised REMIT framework has expanded regulatory supervision, including coverage relevant to increasingly complex energy and financial trading and additional ACER powers concerning cross-border investigations.

In Great Britain, Ofgem monitors wholesale gas and electricity trading and may take compliance or enforcement action where applicable energy-trading requirements are breached.

4. Case Law / Enforcement Example – Danske Commodities A/S and Equinor ASA (France, 2025)

Case Name/Citation: CoRDiS enforcement proceedings concerning Danske Commodities A/S and Equinor ASA (20 January 2025).

Facts: The French regulator found that the companies engaged in conduct relating to annual gas transmission-capacity auctions between France and Spain in 2019 and 2020. Non-genuine capacity bids were found to have created misleading demand signals and artificial congestion.

Legal Issue: Whether capacity-auction behaviour that altered market signals and affected resulting transmission prices amounted to prohibited market manipulation under REMIT.

Judgment: CoRDiS imposed fines of €8 million on Danske Commodities and €4 million on Equinor.

Legal Principle/Ratio Decidendi: Trading or bidding behaviour may constitute manipulation where it gives false or misleading signals or causes market prices to be established at an artificial level.

Significance: The decision demonstrates that manipulation need not involve simply buying or selling the forward contract itself. Conduct affecting capacity and associated costs can influence interconnected energy-price formation.

5. Case Law / Enforcement Example – EDF Energy (Thermal Generation) Ltd

Case Name/Citation: Ofgem investigation into EDF Energy (Thermal Generation) Limited (2020).

Facts: Ofgem found that EDF ETG had repeatedly submitted technical data that did not accurately reflect the capabilities of its West Burton B generating plant, including inflated Stable Export Limit information.

Legal Issue: Whether inaccurate operational information produced misleading signals relevant to wholesale electricity-market operation.

Judgment: EDF ETG admitted breaches and agreed to make a £6 million voluntary payment.

Legal Principle/Ratio Decidendi: Accurate operational information is essential to trustworthy wholesale price formation; misleading physical-market information can engage market-manipulation rules.

Significance: The matter illustrates the close relationship between physical electricity information and financial price signals.

6. Legal and Market Significance

Forward curve integrity is essential because market participants use future prices to allocate billions in investment and hedging decisions. Regulators therefore examine unusual orders, settlement-period trading, related physical and derivative positions, capacity behaviour, algorithmic strategies and information disclosures. ACER expressly warns that layering and spoofing can create misleading supply, demand, or price signals and undermine confidence in market integrity.

Accordingly, forward curve distortion becomes a legal issue when artificial conduct replaces genuine market fundamentals as a material driver of future-price formation. Effective REMIT surveillance, transaction reporting, algorithmic-trading controls, disclosure obligations and enforcement are therefore central to preserving transparent and competitive energy trading systems.