FORWARD CURVE FORMATION AND LIQUIDITY GOVERNANCE

1. Introduction

A forward curve is the sequence of prices at which electricity or other energy products can be bought or sold for delivery at different future dates. In electricity markets, forward curves are essential for hedging, investment planning, generation scheduling, valuation of long-term contracts, collateral management, and risk management. Unlike an ordinary forecast, a forward curve represents prices generated from actual or inferred market transactions and expectations.

Liquidity governance concerns the legal, regulatory, and institutional mechanisms intended to ensure that forward markets contain sufficient credible trading activity and that their prices remain transparent and resistant to manipulation. Thin liquidity can make forward prices unreliable because a small number of transactions may disproportionately influence the curve.

2. Formation of the Forward Curve

Forward electricity prices develop from expectations concerning future spot prices, fuel costs, carbon prices, generation availability, weather conditions, demand, transmission constraints, storage conditions, and regulatory developments.

For example, a market expecting unusually high winter demand may price winter electricity contracts above summer contracts. Conversely, expectations of abundant renewable generation may reduce particular forward prices.

Forward curves may be constructed from exchange-traded futures, broker quotations, bilateral over-the-counter (OTC) contracts, and mathematical interpolation where contracts for particular delivery periods are insufficiently traded. Consequently, the legal integrity of the curve depends heavily upon the reliability of the underlying trading information.

3. Liquidity and Price Discovery

Market liquidity generally refers to the ability of participants to execute significant transactions without causing disproportionate price movements. A liquid forward market normally involves numerous buyers and sellers, meaningful trading volumes, relatively narrow bid-offer spreads, and continuous price information.

Liquidity supports price discovery because prices emerging from competitive transactions are more likely to represent collective market expectations. Low liquidity creates governance concerns because isolated transactions, strategic orders, or dominant participants may materially influence reference prices.

ACER specifically recognises that manipulation can involve orders or transactions designed to create false or misleading signals concerning supply, demand, or price. It also warns that manipulation can occur through conduct designed to secure wholesale energy prices at artificial levels.

4. Regulatory Governance of Forward-Market Liquidity

Within European wholesale energy markets, REMIT—Regulation (EU) No 1227/2011, substantially revised in 2024, provides the central market-integrity framework. It prohibits insider trading and actual or attempted market manipulation while requiring transparency and transaction reporting. The revised framework also extends important protections to wholesale energy products that qualify as financial instruments.

Liquidity governance therefore does not simply mean increasing trading volume. Regulators must ensure that apparent liquidity is genuine liquidity. Artificial orders designed merely to influence the visible order book can undermine forward-price formation.

ACER's guidance on layering and spoofing illustrates this principle. Non-genuine orders can create misleading impressions of buying or selling interest and thereby distort the price-formation process. Such behaviour may undermine confidence and ultimately discourage genuine market participation.

5. Case Law / Enforcement Example – Iberdrola Generación España

Case Name/Citation: CNMC v Iberdrola Generación España SA – Spanish REMIT enforcement proceedings concerning electricity-market manipulation.

Facts: The Spanish competition and energy regulator investigated Iberdrola's management of hydroelectric generation during a period of market sensitivity. The conduct raised questions about whether generation strategies artificially affected wholesale electricity prices.

Legal Issue: Whether strategic management of available generation capacity could constitute prohibited manipulation by causing wholesale prices to depart from competitive market fundamentals.

Judgment: The Spanish authority imposed a substantial penalty after finding manipulative conduct. The matter illustrates how physical generation decisions may influence wholesale price formation rather than manipulation being confined to purely financial trading.

Legal Principle/Ratio Decidendi: Conduct affecting available supply can fall within market-manipulation rules where it produces or seeks to produce artificial wholesale price signals. ACER's broader REMIT guidance similarly identifies unjustified capacity withholding as potentially manipulative where prices cease to reflect competitive supply and demand.

Significance: The example demonstrates the connection between physical electricity-market behaviour and forward-market integrity. Because forward prices incorporate expectations regarding future spot-market fundamentals, manipulation of underlying physical markets can contaminate forward-curve signals.

6. Cross-Market Manipulation and Reference Prices

Forward curves are particularly vulnerable to cross-product and cross-venue manipulation. A participant might trade an underlying electricity product to influence the settlement value of a related derivative. ACER expressly identifies trading designed improperly to influence related derivatives, settlement prices, or another trading venue as potentially manipulative conduct.

This makes surveillance across spot, forward, futures, balancing, and derivative markets essential rather than treating each marketplace independently.

7. Conclusion

Forward curve formation is therefore both an economic and a legal-governance process. Reliable curves require genuine liquidity, transparent information, competitive participation, accurate reporting, and effective surveillance. REMIT-based governance seeks to ensure that forward prices emerge from legitimate supply-and-demand expectations rather than artificial orders, insider information, capacity withholding, or cross-market manipulation. Proper liquidity governance ultimately strengthens price discovery, hedging efficiency, investment confidence, and the integrity of electricity markets.