Drax has submitted a modification to the Balancing and Settlement Code (BSC) that would allow companies within the same corporate group to aggregate their credit cover for energy indebtedness.
The proposal document said this would relieve them from having to lodge excessive credit cover, lowering costs for themselves and their customers.
Under the BSC, parties typically pay their trading charges 29 days after they were incurred and are therefore required to post sufficient credit cover to pay off these debts if they go bust.
Energy indebtedness and credit cover is calculated individually for each BSC party. “Currently there is no option for companies within the same group to provide collective credit arrangements,” the document explained.
“With individual calculation and lodging of credit, parties are unable to optimise provision into a single position resulting in disproportionate and inefficient levels of credit being lodged in aggregate.”
The document said there is “industry recognition” that there is “significantly more credit cover lodged than is necessary” in the event of a default: “Around 45% of BSC parties are related to at least one other by parent company and the proposer believes that allowing related BSC parties to combine their energy indebtedness prior to the credit cover percentage being calculated will help address excessive credit requirements.”
By allowing related companies to aggregate their energy indebtedness, and in turn reduce the amount of credit cover they need to provide, the modification P426 would “reduce the costs of those parties, enabling them to price more competitively in the market, resulting in lower costs to consumers.”
“This means, for example, that if one BSC party was to have a strongly negative energy indebtedness but a related BSC party were to have a lesser positive energy indebtedness, then combining the energy indebtedness would remove the need to lodge separate credit cover without any increase in risk to the industry.
“In situations where all related BSC parties have positive energy indebtedness, combining them for the credit cover percentage calculation will also remove the need to provide a repeated operational credit ‘buffer’ for all related BSC parties.”
The proposal stressed that: “Importantly this will not reduce the amount of credit cover lodged below the level needed to cover the risk of default, nor will it increase the credit risk or cost for Parties that do not (or cannot) aggregate their credit provision in this way.
“As well as improving efficiency for existing related parties, thereby making them more cost competitive, the arrangements would remove a potential barrier to entry for parties wishing to adopt a related BSC party corporate structure.”
An initial assessment of the proposal was presented to the BSC panel on Thursday (14 October).
Elexon, the code administrator for the BSC, is currently consulting on increasing the Credit Assessment Price (CAP) – the price applied to energy indebtedness to calculate credit cover requirements – to £259/MWh. The CAP is scheduled to rise to £184/MWh on 21 October, having been increased to £137/MWh on 5 October.