Credit where it’s due

“Elexon’s role and experience as code manager has helped to deliver changes that improve accuracy in both credit and settlement calculations.”

The failure of Brilliant Energy brings to 11 the number of suppliers that have exited the energy market in under three years. Nobody wants to see suppliers leaving the market in this manner: not only are jobs lost in our industry, but also the remaining companies are immediately saddled with unpaid bills, while ultimately consumers will bear the costs. Elexon’s job as the manager of the balancing and settlement code (BSC) is to do everything possible to minimise costs that arise under the BSC.

To ensure this is the case, the BSC lays down stringent credit and payment arrangements. A default can be triggered just 24 hours after an issue occurs, with automatic restrictions on trading wholesale electricity. Further and more significant actions can be agreed by the BSC panel, a group of independent industry experts, which includes consumer representatives.

Although stringent, the BSC credit arrangements are also reasonable. They require suppliers to cover unpaid debts that arise from day-to-day operation. Those debts can be kept to a minimum by suppliers accurately forecasting how much energy their customers will use and buying sufficient energy to cover that consumption.

Improvements in Elexon’s processes and the BSC over the years have cut the cost of unpaid charges. The £2.8 million in unpaid BSC bills of the failed suppliers since 2016 is modest compared with the situation in November 2008, for example, when two failed suppliers, Bizz Energy and Electricity 4 Business, had racked up £5.8 million in unpaid charges.

Our role and experience as code manager has helped us work with the industry to deliver changes that improve accuracy in both the credit and settlement calculations. The changes include greater accuracy in estimating usage before the first settlement calculation, accelerating the first settlement calculation from 15 to five working days after settlement date, moving to guaranteed weekday business hours for credit management, and the development of a website portal where participants can see live data for their credit calculations.

The lower debts are not purely related to Elexon’s operation. Suppliers have also been identifying issues earlier and communicating with Ofgem to exit in an orderly manner. This has limited the number of days a supplier is exposed to buying their customers’ energy demand at cash-out prices – a failing supplier’s final days can account for its largest debts.

We continue to support new entrants and carry out qualification testing with suppliers wanting to join the electricity retail market. We also support Ofgem’s plans for new tests for potential suppliers, requiring them to demonstrate they have the resources to manage their business for at least 12 months after entering the market.

There are 11 codes governing the energy industry, with five code delivery bodies and six code managers. Among the code bodies, Elexon operates one of the most stringent and transparent credit requirements to protect industry parties from the costs of failure. The government and Ofgem are currently reviewing the codes, and we support their aims to consolidate and simplify them.

There may be an opportunity here to pool the credit arrangements across the codes, which could help existing companies and new entrants by lowering the overall credit burden.

Our design of a target operating model for half-hourly settlement right across the electricity market could also help to reduce the credit burden on suppliers. It would bring forward settlement and payment dates, automatically reducing the number of days for which credit cover is required.

Elexon has played its part in helping the industry to manage supplier failure over the past three years, working closely with the BSC panel, BSC parties and Ofgem. Our focus is always on keeping the costs to BSC parties to a minimum, managing an orderly exit if suppliers do fail, and helping to support the entry of new entrants into the market.