P385 ‘Improving the efficacy and efficiency of the Section H Default provisions’
Formal title: Improving the efficacy and efficiency of the Section H Default provisions
P385 will amend BSC Section H to introduce new Events of Default and reduce the periods after which certain Events of Default are triggered, as well as removing parameters for certain Events of Default from the BSC and place them under BSC Panel control, giving the Panel the power to approve changes to rates and timescales, subject to industry consultation. This Modification aims to increase visibility to industry of Parties at risk and enable earlier remedial action by the BSC Panel.
Listen to the podcast for a quick explanation of the proposal
The BSC Panel has the ability to take mitigating action and provide financial protection when an Event of Default is triggered, but the current arrangements in BSC Section H ‘General’ are overly complex and prolong the period before an Event of Default is declared until it is often too late.
The frequency of Balancing and Settlement Code (BSC) Parties failing to pay their debts and defaulting on the BSC has increased in recent years. After a period of 10 years without a Supplier of Last Resort event, there was a single occurrence in 2016 followed by an unprecedented 7 events in 2018 and 3 in 2019 at the time of writing.
Therefore, when a Party in financial difficulty has been identified, the BSC Panel should have the opportunity to apply Consequences of Default as early as possible. This will allow failing Parties be promptly identified to the BSC Panel and the wider industry, potentially allowing the Panel to restrict the Parties activities and risks to counterparties.
This Modification proposes to amend BSC Section H in such a manner as to introduce new Events of Default and simplify and reduce the periods after which an Event of Default is triggered.
The following changes should be considered by an industry Workgroup:
- Parties can remain in Level 1 Credit Default for 90 days or any intermittent period of 120 days out of 180 before triggering an Event of Default. Level 2 Credit Defaults can remain for 60 days or any period of 75 days out of 120. These periods before an Event of Default should be reduced with no intermittent periods.
- A Relevant Credit Default Series that will lead to an Event of Default occurs when a Party has breached 100% Credit Cover Percentage (CCP) 6 times in 6 months with a cooling off period in which further Credit Defaults are no longer counted. The number of occurrences should be reduced and simplified to count any Level 1 or 2 Credit Default towards a Relevant Credit Default Series, with no cooling off period.
- A new Event of Default should be introduced that triggers when a BSC Party uses Credit Cover to pay Trading Charges on 3 or more occasions within a 30 calendar day rolling period.
- A new Event of Default for Parties should be introduced that triggers when a Party publically announces that they are ceasing to trade.
P385 was raised by Centrica on 3 April 2019.
ELEXON presented the Initial Written Assessment to the BSC Panel at its meeting on 11 April 2019, who recommended that the Modification proceed to the Assessment Procedure.
The first meeting of the P385 Workgroup was held on 17 June 2019 at ELEXON’s offices.
The second meeting of the P385 Workgroup took place on 15 July 2019 where the solution was finalised and remaining Terms of Reference considered.
P385 was issued for Assessment Procedure Consultation on 1 August 2019. The Assessment Procedure Consultation closed on 21 August 2019. There were 3 responses from Suppliers, all of whom are supportive of the proposal and its recommendation as a Self-Governance Modification.
Please note that this is your final opportunity to comment on this Modification.
Please send your response to firstname.lastname@example.org using the form attached to the consultation by 5pm on Wednesday 30 October 2019. We would also be happy to take your response verbally over the phone.
The BSC Panel will consider the Draft Modification Report at its meeting on 14 November 2019.