The cost of a REMIT breach
Ofgem has stunned the energy industry by issuing a record fine against InterGen group for multiple breaches of Article 5 of REMIT, which prohibits actual or attempted market manipulation on wholesale energy markets. On 15 April 2020 Ofgem confirmed a fine of £47.8m, which included a repayment of approximately £12.8m reflecting the money received by InterGen as a result of the breach. The fine was subsequently reduced to £37.3m after InterGen admitted the breaches and agreed to an early settlement.
This is not the first fine for a breach of REMIT issued by Ofgem. Engie Global Markets was fined £2.1m in September 2019 and National Grid was investigated in 2017 (but the breach was found to be unintentional and no fine was issued) receiving a statement of non-compliance. The sheer scale of the fine levied against InterGen was however surprising.
What was the breach?
InterGen companies own a number of power stations in the UK which were found to have committed numerous breaches of REMIT over a four-day period in 2016 in relation to the false submission of data to National Grid in relation to the GB Balancing Mechanism in order to manipulate and increase profits.
The specifics of the breaches are quite complex, however they centred around physical notifications submitted by InterGen traders to National Grid indicating that the power stations would not be generating from midday until the end of the day. Crucially this included the peak demand period of 5pm to 7pm which is known as the "darkness period". Ofgem found that these notifications were false or misleading as InterGen traders had also entered into separate contracts with third parties to generate electricity during this period (including during the darkness period) which they could only realistically perform by generating electricity.
As a result of the plants not being available Ofgem considered that National Grid was then induced to take a balancing action which included offering payment through the GB Balancing Mechanism to at least one of the plants to generate. Once this offer was made InterGen traders submitted revised physical notifications to indicate that contrary to the earlier information, the power plants would actually be generating through the darkness period.
Ofgem concluded that InterGen traders had disseminated false or misleading data on the supply of power for the darkness period in order to be paid to generate during the day for large sums of money in the Balancing Mechanism. As a result this constituted a breach of Article 5 of REMIT.
What is REMIT
The Regulation on Energy Market Integrity and Transparency (REMIT) is a set of EU-wide market rules which is intended to prevent market abuse and manipulation in wholesale energy markets. Each EU member state is required to appoint a National Regulatory Authority (NRA) to enforce the REMIT rules, which includes the power to issue fines for breach. Currently the NRA for Northern Ireland is the Northern Ireland Authority for Utility Regulation (NIAUR) and the NRA for Ireland is the Commission for Regulation of Utilities (CRU).
Market participants are required under Article 9 of REMIT to register with their local NRA, or if they are based outside of the EU, with the NRA in the EU member state where they are active. A market participant is only permitted to register with one NRA. Market participants (or third parties on their behalf) are also required to report energy transaction data to ACER (the EU body which administers REMIT), which it can assess for compliance with REMIT. Failure to comply with REMIT (including as to registration with an NRA) is a criminal offence which as demonstrated above can lead to significant penalties.
Possible Brexit issues for REMIT in I-SEM
The European Union (Withdrawal) Act 2018 provides that once the UK leaves the EU, large parts of EU law will automatically be preserved and become UK legislation i.e. they will remain in force in the UK. This includes REMIT which means that participants in I-SEM will need to continue to comply with REMIT. At the moment any participant in EU energy markets can register with one NRA, which is then recognised in other EU member states.
An open letter from ACER on 8 January 2019 states that in a "no deal" Brexit, UK-based market participants (which includes market participants based in Northern Ireland) will need to re-register with another NRA in order to trade in the EU.
NIAUR has confirmed in its information note of 6 February 2019 that "in a “no deal” Brexit, all market participants entering into transactions, or placing orders to trade, in wholesale energy products where delivery is within the SEM, will be required to register with the Utility Regulator (UR) within four weeks of EU exit. However, the UR recognises the existing registration of all currently registered market participants in accordance with REMIT Article 9(1) and therefore participants registered with either CRU, Ofgem or with an NRA of an EU Member State, will not need to re-register until otherwise directed by the Utility Regulator."
Market participants who trade in I-SEM and who are currently registered for REMIT with NIAUR or Ofgem will not need to do anything immediately in order to satisfy UK or Northern Ireland law. Nevertheless, it does not appear that ACER is minded to recognise existing registrations of market participants with Ofgem or NIAUR and so it seems that they will need to be re-register with another NRA immediately post Brexit unless transitional arrangements are agreed.
This has implications for market participants who trade in I-SEM as post Brexit they may find that they need to register separately with NIAUR in order to comply with NI law and CRU in order to comply with EU law. As noted above, non-compliance may lead to criminal sanction.
Implications of the InterGen case for Ireland and Northern Ireland
Christian Zinglersen, director at ACER, confirmed that this was the largest ever fine issued for a REMIT breach stating "This sanction decision under REMIT sends out a clear signal and importantly contributes to the well-functioning, transparent and integer performance of wholesale energy markets."
This would suggest that other NRA's may issue similar fines in future for REMIT breaches. To date no fines have been issued for a breach of REMIT in Ireland or Northern Ireland however market participants should note that REMIT is not merely a tick box exercise and should take care put the correct systems and processes in place to comply with REMIT reporting.
Market participants will also note the importance of working with NRAs to report breaches and to takes steps to prevent reoccurrence. InterGen secured a substantial discount to the fine by admitting its breaches and as noted above National Grid received a statement of non-compliance rather than a fine. Therefore, market participants who identify a REMIT breach should engage early with their NRA.
For more information please contact Mark Stockdale, Partner or any member of the Energy, Infrastructure & Natural Resources Belfast team.
Date published: 19 May 2020