Gaming – The Art of Electricity Market Manipulation
Electricity markets, though designed to ensure fair pricing and reliable power supply, are frequently gamed by power companies seeking to make undue gains.
Gaming in the context of electricity markets refers to situations when participants manipulate rules or scenarios to gain unfair advantages. While doing this the participants may not be breaking the explicit rules but exploiting them for profits. Rules that can be exploited are called regulatory blind spots – common in fast evolving sectors.
Power producers employ various tactics to manipulate these complex systems such as creating artificial congestion on transmission lines, strategically withholding generation capacity or submitting misleading cost information. These tactics result in artificially inflated electricity prices that ultimately burden consumers.
These gaming behaviours are significant because they can increase electricity costs for consumers, reduce grid reliability and undermine the efficiency of electricity markets.
What is the California Energy Crisis ?
The California energy crisis of 2000-2001 is one of the most egregious examples of gaming in the history of deregulated electricity markets. What made this crisis particularly shocking was the stark contrast between California's generating capacity and actual demand during the blackouts.
The state possessed 45 GW of installed generating capacity, yet experienced widespread blackouts when demand reached only 28 GW. This was sufficient evidence to conclude that the crisis was manufactured rather than the result of genuine supply constraints.
At the center of this manipulation was a Company named Enron, along with several other energy trading companies, who exploited fundamental flaws in California's newly deregulated electricity market structure.
These traders developed a sophisticated arsenal of strategies, each with colourful code names that belied their damaging impact on California's economy and residents.1
The economic impact was devastating. Electricity prices surged by an astonishing 800% over just eight months. The crisis triggered rolling blackouts that disrupted the lives of millions of Californians and their businesses.
The aftermath prompted sweeping reforms in energy market regulations nationwide, with the Federal Energy Regulatory Commission (US Electricity Regulator) introducing new market monitoring capabilities and anti-manipulation rules.2
Scenario in India
In India, electricity market gaming is explicitly defined and addressed within the Indian Electricity Grid Code (IEGC)3 and the Unscheduled Interchange (UI) Regulations of the Central Electricity Regulatory Commission. The regulations specifically target practices such as artificial congestion creation, deliberate misrepresentation of availability, and strategic withholding of generation capacity—activities that distort market signals and undermine system reliability.
“gaming‟ in relation to these regulations, shall mean an intentional mis-declaration of declared capacity by any generating Station or seller in order to make an undue commercial gain through Unscheduled Interchange charges.”
Under the Grid Code, gaming is characterised as deliberate misrepresentation of generator availability, intentional deviation from committed schedules, or manipulative declaration of technical parameters that could provide unfair commercial advantages. These provisions are particularly focused on preventing actions that might compromise grid security while allowing participants to extract undue profits from system constraints.
The emphasis under the Indian Regulations is on “intentional” - placing a larger burden of proof on the regulator than the defaulter.
The down side is that sophisticated gaming strategies can be disguised as rational economic behaviour or just misunderstanding of regulations. Having said that, it does protect market participants from being penalised for good-faith decisions made under uncertainty or for optimising their operations within established market rules.
A detailed analysis of “intentional” has been done in a recent judgment of the Appellate Tribunal for Electricity (APTEL) in a dispute arisen in light of allegations of gaming and its tariff impact.4
While India hasn't experienced a single crisis as dramatic as California's Enron scandal, there have been several notable instances of market manipulation or gaming in India's electricity markets:
Short Term Spikes – Generators have been investigated by the regulators on various occasions for allegedly withholding power generation capacity and subsequently selling it at higher prices in the short-term market when prices spiked.
UI (Unscheduled Interchange) Mechanism Exploitation: Some generators have been caught manipulating the UI mechanism, which was designed to maintain grid stability. They would deliberately under-declare capacity, then over-generate during periods when UI rates were high, earning substantial premiums.
RPO (Renewable Purchase Obligation) Certificate Market: There have been instances of market manipulation in the Renewable Energy Certificate trading market, where entities created artificial scarcity to drive up prices.
2012 Grid Failure: Though not entirely due to market gaming, the massive July 2012 blackout that affected over 620 million people was partly attributed to some states drawing excessive power from the grid beyond their allocated quotas, which could be considered a form of gaming the system.
Power Exchange Bidding Strategies: Some participants in India's power exchanges (IEX and PXIL) have been found using coordinated bidding strategies to influence market clearing prices.
Structural Flaws Enabling Gaming
The Indian electricity market continues to evolve, with regulators working to close loopholes that allow for gaming while balancing the need for market efficiency. These loopholes manifest in several forms which are essential to understand if a discussion on policy reform is intended. Some of the current gaps are:
Schedule revision allowances in the Grid Code that permit generators to strategically withdraw capacity with minimal consequences
Inadequate penalties that make gaming financially rational for large market participants
Price cap mechanisms that distort market signals while failing to address underlying scarcity issues
The 2021 Power Market Regulations amendments represent incremental progress while covering cartelisation et al. but fail to address core structural issues. The issue I reiterate is that disclosure requirements merely increase paperwork without fundamentally changing the risk-reward calculus for potential gamers.
Reform Imperatives
The fundamental issue remains misaligned incentives. We need outcome-based regulation that evaluates market participant behaviour against efficiency and consumer welfare - rather than just technical compliance. This means regularly examining whether prices are reasonable, if consumers are benefiting, and if the grid is operating efficiently. Success would be measured by outcomes like stable prices and reliable service—not by how many regulatory boxes were checked.
Currently, gaming the system often remains profitable even after penalties because fines are typically fixed amounts that don't match the massive profits from manipulation. Reform would ensure that penalties directly relate to how much money was made through gaming with penalty exceeding the profit made.
Right now, oversight is fragmented between state and central authorities, creating gaps that clever market players exploit. A unified monitoring approach would coordinate oversight across all jurisdictions, sharing data, standardising monitoring techniques, and closing the loopholes that exist between different regulatory boundaries. This would make it much harder for companies to hide manipulative behaviour by exploiting regulatory blind spots.
These reforms would shift the fundamental incentives in electricity markets, making it more profitable for companies to focus on actual operational improvements rather than creative gaming strategies.
Disclosure: The author has previously represented a party in a market manipulation dispute before the Appellate Tribunal for Electricity.
Love it! Thank you for writing in a simple way for a lay reader like me! I have a slightly better understanding now.
Do you have any book recommendations on this topic, which explains how the grid was setup in India? Understanding the story more holistically.