BSC Insight: What is driving the latest increases in Credit Assessment Price?

In this BSC Insight article, Mehdi Jafari outlines the recent trends in forward market prices and how we measure the Credit Assessment Price (CAP) process effectiveness against the System Buy Price. The article also provides an update on our Insight Article in May 2021, where the sixth CAP change of 2021 was in process.

Activity in 2021

We issued a consultation on 20 September about increasing the Credit Assessment Price (CAP) to a new record level of £184/MWh. This comes only two weeks after the last CAP trigger event on 6 September, which resulted in setting a record breaking CAP of £137/MWh due for implementation in early October.

This is the tenth time in 2021 that the CAP is going to change, and the ninth time it has increased. It is also the third time in a row this year that a new record CAP will be set.

This year has seen the highest number of CAP changes in a year since the CAP weekly monitoring process was introduced in 2007.

There have been 31 CAP events since 2017,  and the 10 of those that occurred in 2021 represents represents the highest amount of events to happen in any five year period. This followed a decision to change the CAP monitoring process to take forward market prices from the next two months rather than the next quarter into account. 

In this article, we discuss data which shows that:

• In 2021 two new CAP records were set so far, £113/MWh on 9 Aug, £137/MWh on 6 September. The previous record was £108/MWh in 2008. These will be surpassed by the £184/MWh cap if this comes into place in October.
• Counting the CAP trigger event on 20 September, more than half of the CAP changes have occurred in the last five years (2017-2021), 31 out of 59 CAP changes.
• Forward market prices are still rising for a variety of reasons. 

What is CAP, and why do we use it?

The CAP is a parameter defined in Section M1.4 of the BSC as ’the price which it would be appropriate to use to determine the equivalent financial amount of Imbalance Parties’ Energy Indebtedness’. Under the BSC arrangements, payments to and from Trading Parties in respect of Trading Charges arising on any particular Settlement Day are made, on average, 29 calendar days later. Each BSC Party is required to lodge credit with Elexon to ensure that there are sufficient funds available to cover that Party’s Trading Charges, should the Party become unable to pay.

How the CAP review process works

On the first working day of each week, the CAP is compared to a value known as the reference price. The reference price is derived from forward market prices, a five-day rolling average of trades being delivered over the next two months. If the difference between the CAP and the reference price exceeds the trigger value, 10 percent of the CAP rounded to the nearest £/MWh, a CAP review process begins.

How the CAP is calculated

The CAP review process contains a consultation period and an implementation period. The consultation period lasts for five working days after the trigger event. If we do not receive any responses, or no responses disagree with the proposed CAP, the implementation period begins after the consultation period and lasts for 15 working days. The implementation date for the new CAP falls on the end day of the implementation period.

September 2021 trigger events

For both of the trigger events that have occurred so far in on 6 and 20 September, the provisional implementation dates fall in October. Therefore, the new CAP value will be calculated using a five-day rolling average of the forward market prices available for November and December. This value was calculated on 6 September at £136.99/MWh and on 20 September at £184.27 so the new CAP values proposed in the consultations issued on 6 September and 20 September were respectively £137/MWh and £184/MWh.

The graph below shows how the forward market prices have changed since 15 June 2021.

Price drivers

The reference price has been rising this year as a result of consistently increasing forward market prices. Elexon’s BMRS data shows that GB has had 17.55% less generation from wind over the first eight months in 2021 compared to 2020. Specifically in September 2021, up to 21 September, wind generation contributed only to 1.23TWh, or 8.90% of total generation. This is a considerable decrease when compared to the same period in September 2020 where wind made up 2.80TWh, or 20.96% of total generation.

Increases in demand, decreases in temperature

Demand has also increased by 6.93% over the first eight months in 2021 compared to the similar period in 2020. Moreover, the temperature from January up to the end of August 2021 has been on average 1.26°C colder than the same period is 2020. 2021 has remained the coldest year since 2014. In addition to all of these factors, according to the Independent Commodity Intelligence Services which provides forward market data to Elexon’s CAP monitoring process, the cold winter during 2020/21 has severely depleted gas storage levels, which has in turn driven up the forward market prices globally.

Effects on the reference price

The above graph shows the reference price was £79.38/MWh on 15 June (5-day rolling average of July/August prices) and increased to £132.43/MWh on 6 September (five-day rolling average of October/November prices). 

Following that it surged to £179.88/MWh on 20 September. On 20 September the CAP used in the CAP monitoring process was £137/MWh notified only a few days before, with a +/- £14/MWh trigger band. As a result, the reference price of £179.88/MWh was higher than the upper trigger level of £151/MWh and the second CAP review process in September 2021 was triggered.

CAP vs System Buy Price

We can use System Buy Price (SBP) as a measure to evaluate the effectiveness of the CAP. The graph below shows the comparison between CAP and SBP. You can use the filter on the graph to see the comparison between the CAP and either the daily average SBP or the 30-day moving average SBP.

The data shows that since 2014, the percentage of Settlement Periods (SPs) where the 30-day rolling average SBP was lower than the CAP was below 53.05% during the year until it fell to 25.75% of SPs in 2021.

In other words, during 74.25% of the SPs in 2021 the 30-day moving average SBP was greater than the CAP. This is the highest percentage of SPs in a year to have a 30-day moving average SBP greater than CAP since 2014.

Record percentage CAP increases

Although the CAP increasing from £113/MWh to £137/MWh has broken a record for the highest CAP amount, it is not the highest percentage increase to have occurred. This was an increase of 21%, the maximum CAP percentage increase was on 22 November 2016 when the CAP increased from £53/MWh to £98/MWh, which was an 85% surge.

What happens now?

The CAP of £137/MWh will be implemented on 5 October. The consultation on increasing the CAP to £184/MWh will close on 28 September and the committee has already decided to meet after this, to discuss the outcome. We will update stakeholders following the committee’s decision and we are also looking to publish another Insight Article around the relationship between the CAP and Credit Cover.