Changes proposed to make trading easier and more practical for Parties affected by a default
Elexon is consulting on a proposal to amend the Balancing and Settlement Code (BSC) Credit Cover arrangements to help reduce the potential for BSC Parties to enter Credit Default.
By increasing the notice period for counterparties following a credit default to two hours the risk of imbalance can be mitigated.
- See the report phase consultation for Modification P469 ‘Credit Default Refusal and Rejection Period’.
What is Credit Cover?
Credit cover is collateral that must be lodged by BSC Parties (which include Generators, Suppliers and a range of other companies including exchanges) relative to the Trading Charges they incur as a result of supply and demand imbalances. It acts as a security deposit, reducing the risk that other Parties face if a company cannot pay its Trading Charges.
If a Party’s Credit Cover Percentage (CCP) goes above 80% (meaning the amount of money they owe in Trading Charges exceeds 80% of the amount of Credit Cover they have committed), they enter the Level 1 Credit Default process. If their CCP exceeds 90%, then they enter Level Two Credit Default.
Parties that trade electricity have to submit Energy Contract Volume Notifications (ECVNs) or Metered Volume Reallocation Notifications (MVRNs) to Elexon’s Energy Contract Volume Allocation Agent (ECVAA) via a ECVN Agent (ECVNA).
ECVNs are used to notify the ECVAA of contracts agreed to buy or sell quantities of electricity. Information submitted in MVRNs is used to move energy volumes from one ‘energy account’ to another. This is often used where a BSC Party may have multiple licences and moves energy volumes around to reduce indebtedness. Altogether, ECVNs and MVRNs form an important part of for our Trading Charge calculation process.
Parties can submit ECVNs and MVRNs at any time up to the start of a Settlement Period and they can be in force for the same Settlement Period each day until cancelled. If a Party enters Level Two Credit Default, then any ECVNs and/or MVRNs submitted will be refused. Any ECVNs or MVRNs already in force will be rejected for the duration of being in Level Two Default, once the Party has been in Level Two Default for more than 90 minutes.
New two-hour window proposed
Modification P469 proposes to introduce a two-hour window from when Elexon publishes information about a company entering Credit Default, until ECVNs and/or MVRNs related to the defaulting party are rejected and refused. Currently a much shorter window exists, therefore allowing up to two hours would make trading easier and more practical for Parties affected by a default, and is expected to benefit Parties where collateral requirements can be reduced.
Next steps for the proposal
The deadline for responses on the report phase consultation for P469 is 2 August 2024.
Elexon expects the Panel to make a recommendation to Ofgem on the Modification in August. If Ofgem approved the change before 26 Sept it could be implemented in November 2024. If Ofgem makes a decision between 26 Sept and 16 Jan. it would be implemented in February 2025.
Further changes to credit arrangements to support the industry
Development of P469 is one of the outcomes of work that Elexon has been doing with the industry through Issue Group 106. This group has been examining the credit cover arrangements to ensure that they give sufficient protection to the market from Supplier failure while also not being too much of a burden on market participants.
The Issue Group also identified opportunities to improve the accuracy of the estimation procedures within the credit cover calculation, which could be introduced after MHHS implementation has been completed in December 2026. The aim of this work is to reduce collateral requirements for companies and Elexon will develop the Modification over the next year with industry.