ELEXON insights: Keeping costs down when Suppliers fail
Roger Harris, Market Operations Manager at ELEXON, looks at the number of recent Supplier failures and the issue of Supplier of Last Resort processes and costs.
Earlier in March another electricity supplier, Brilliant Energy, failed adding to the 10 that have exited the market through Ofgem’s Supplier of Last Resort (SoLR) process in under three years.
Published: March 2019
Stringent credit arrangements
Ultimately consumers bear the costs of supplier failure and as well as lost jobs in our industry, it impacts on the remaining companies that have to cover their unpaid costs.
ELEXON’s job as the manager of the Balancing and Settlement Code (BSC) is to do everything we can to minimise the parts of those costs that arise under the BSC.
To ensure this is the case, the BSC has stringent credit and payment arrangements in place. These can trigger a default as soon as 24 hours after an issue occurs, with automatic restrictions on trading wholesale electricity.
Further and more significant actions to restrict the operation of a BSC participant can be agreed by the BSC Panel, a group of independent industry experts, which includes consumer representatives.
In cases where suppliers have failed, the Panel has met at short notice to consider each situation with the opportunity for representation from the supplier.
Keeping debts to a minimum
The BSC credit arrangements are also reasonable. They require suppliers to cover unpaid debts that arise from day to day operation. However, by suppliers accurately forecasting how much energy their customers will use and buying sufficient energy to cover that consumption, debts can be kept to a minimum.
Drawing on comparisons with failures in November 2008, there were at that time £5.8m of unpaid charges for two failed suppliers. Bizz Energy and Electricity 4 Business (Bizz Energy’s customer base was sold in a trade sale and a new supplier was appointed by Ofgem for customers of Electricity 4 Business through the SoLR process).
In contrast the £2.8m cost of unpaid BSC bills of the 10 failed suppliers since 2016 is relatively modest. This is in part attributable to improvements in ELEXON’s processes, and the BSC.
Our insight into defaults in 2018
ELEXON produced analysis on the data behind the defaults and the 1.85% of electricity meters that have been transferred to a Supplier of Last Resort in 2018.
Graph 5 in the Insight article, Value and number of defaulted payments, shows the number and total value of defaulted payments from Parties in and out of Section H Default between August 2017 and December 2018.
Improving credit and settlement calculations
In our role as code manager of the BSC, and using our experience of operating the BSC arrangements as well as administering the rules, we have worked with industry to deliver a series of changes to improve accuracy in both the credit and settlement calculations.
The changes, delivered through eight BSC Modifications are:
- Improvements in the accuracy of estimated data used prior to the first settlement calculation
- Acceleration of the first settlement calculation from 15 to five working days after the Settlement Date
- Moving to guaranteed weekday business hours during which BSC Parties can manage their credit
- Development by ELEXON of a website portal where participants can see live data for their credit calculations and configure their own email alerts
The Modifications that have brought in these changes are: P253, P307, P310, P326, P345, P357, P358, P359.
The lower debts are not purely related to ELEXON’s operation. Suppliers have also been identifying issues earlier and communicating with Ofgem to exit in an orderly manner.
This has limited the number of days that the supplier is exposed to buying their customers’ energy demand at cash out prices. These final days of a failing supplier can result in the largest debts.
Supporting new entrants
We continue to support new entrants and we carry out qualification testing with new suppliers wanting to join the electricity retail market. This is so they understand what is required to comply with the BSC.
We also support Ofgem’s plans for new tests for suppliers wanting to enter the market, which would, amongst other things, require them to demonstrate that they have the funds and resources to manage their business for at least 12 months after entering the market.
Streamlining credit costs
We have played our part in helping the industry to manage supplier failure over the past three years working closely with the BSC Panel, BSC Parties and Ofgem.
Our focus is always on keeping the costs to BSC Parties to a minimum, managing an orderly exit if suppliers do fail, and helping to support new entrants into the market.
There are 11 codes governing the energy industry, with five code delivery bodies and six code managers. We strongly support reforms to streamline and consolidate the codes.
ELEXON already operates one of the most stringent and transparent credit requirements of any code body in order to protect industry parties from the costs of failure.
The Government and Ofgem are reviewing the energy codes, and we support their aims to consolidate and simplify them. As part of this there may be an opportunity to pool the credit arrangements across the codes. This could help existing energy companies and new entrants by lowering their overall credit burden.
Target Operating Model
Our design of the Target Operating Model for Market-wide Half-Hourly Settlement in the electricity market could also help to reduce the credit burden on suppliers. It will bring forward the settlement and payment dates which would automatically reduce the number of days for which credit cover is required.