BSC Panel to take faster action against electricity company failure
From 27 February 2020 a change to the Balancing and Settlement Code (BSC) means the BSC Panel can take faster action if an electricity company is at risk of financial failure and apply stringent operating restrictions. This will better protect BSC Parties and ultimately consumers.
The BSC, managed by ELEXON, ensures that payments for imbalances in wholesale electricity supply and demand are settled accurately.
Being able to take faster action is essential to protecting industry and consumers from the cost of bad debt in the event that suppliers and generators are at risk of financial failure.
Number of electricity companies defaulting has increased
The number of BSC Parties defaulting (failing to pay their debts for trading under BSC rules) has been increasing, meaning greater amounts of unpaid imbalance charges need to be recovered from companies that are still operating in the market. Overall, 16 Parties went through Ofgem’s Supplier of Last Resort process in the last two years (2018/2019) leaving £4.7m of BSC charges to be picked up by remaining suppliers and generators.
The changes in Modification P385 allow the BSC Panel to apply existing measures against BSC Parties more quickly than before. The Panel is an independent group of industry and consumer experts which makes recommendations or decisions on changes to the BSC rules.
Faster action to protect against electricity company financial failure
The changes going live in February are:
- A new event of default being triggered where late payment of imbalance charges has occurred on three or more occasions within a 30 day period (where payment is two business days late and Credit Cover is used to clear the outstanding amount)
- A new event of default being stated when a Party publicly announces that it is ceasing to trade
- Stating an event of default when a Party breaches its Credit Cover limits three times within six months (compared with six times in six months under current practices)
- For monthly operating charges (that suppliers and generators must pay to be part of the BSC) default notices for non-payment will be reduced from 15 to five business days. A new default will trigger if the Party has not paid monthly operating charges on time on three occasions within 12 months
The new triggers for events of default will be published on ELEXON’s website.
The Panel already has powers to suspend a Party’s right to trade and can recommend a block on suppliers taking on new customers. It can also expel a company from the BSC if it does not pay BSC charges.
ELEXON provided its expertise throughout the rule change process to ensure that the new default triggers align with its experience of managing the BSC. We also worked closely with Centrica, the proposer for the Modification.
Chairman of the BSC Panel and ELEXON’s board comments on the reforms
Michael Gibbons, Chairman of the BSC Panel and ELEXON’s board, said: “Nobody wants to see energy companies in financial distress. However, when this does happen, the BSC Panel needs to have powers to act more quickly. This protects other BSC Parties from incurring additional charges.
“The current arrangements for triggering events of default are complex and can prolong the period before the Panel can intervene. Having these newly defined events in place will make it easier for the Panel to take action more quickly when a company is at risk of financial failure, so that the costs to the industry and consumers are minimised.”
Credit cover and credit defaults in the Balancing and Settlement Code
The BSC is one of 11 codes which provide the commercial arrangements underpinning the energy sector. The BSC requires that suppliers and generators (known as BSC Parties) hold collateral with ELEXON. This is so that there are sufficient funds to cover outstanding charges, should they be unable to pay (known as Credit Cover). Charges arising on any particular Settlement Day are typically paid/received 29 calendar days later.
Each Party is required to have Credit Cover in place that covers net charges across this 29 day period. Should the Party default, the collateral can be used to pay off its debts. If a Party has not lodged enough credit cover and cannot pay its imbalance charges, the debts must be recovered from all other BSC (non-defaulting) Parties in accordance with their market share.
Credit cover percentages
The credit default process occurs when a Party’s credit cover percentage exceeds 80%. This means that a Party’s yet-to-be-paid imbalance charges make up 80% of its Credit Cover. This is known as Level 1 credit default. If the Party’s Credit Cover percentage exceeds 90% it enters level 2 credit default.
If any company enters level one or level two default ELEXON has established procedures for alerting the company, giving it an opportunity to increase its Credit Cover to reduce the credit cover percentage. If action is not taken to do so, ELEXON publishes a public notice of the default.
More information on Modification P385
Background information on the Modification, including the final Modification report is available in the BSC Change section of the website