When European electricity markets recently went haywire for 24 hours, a group of high-flying hedge funds lost money. Given their size, the amounts involved were small, though still enough to cause howls of distress. Should we have some sympathy for their billionaire owners? Before you answer “no” — or perhaps “hell no” — let me describe what happened, and why the hedge funds are right to feel aggrieved.
Early on June 25, EPEX Spot, a key exchange handling electricity trading, released what it called a “feature upgrade” to its main software. By 10:08 a.m. Paris time, the exchange could no longer communicate with its customers even after rushing to reverse the upgrade, according to a preliminary report. The failure created a cascade that, at its most extreme, pushed German short-term power prices 3,000% above typical levels, while French prices plunged to nearly zero. For the market as a whole, the total losses probably are somewhere around €300 million ($327 million) in a single day.