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Section M: Credit Cover and Credit Default

v 33.0

Section m: credit cover and credit default

Simple Guide


Section M covers the provision of Credit Cover by each Imbalance Party and the consequences in the event that this Credit Cover is insufficient. These consequences are primarily the refusal and rejection of Energy Contract Volume Notifications (ECVNs) and Metered Volume Reallocation Notifications (MVRNs) as provided for in Section P. Consequences of frequent or persistent Credit Default are also outlined in Section H. Accordingly, Section M sets out:

(a) calculation of an Imbalance Party's Energy Indebtedness;

(b) the basis on which an Imbalance Party's Energy Credit Cover will be determined;

(c) the calculation to determine the amount of an Imbalance Party's Energy Credit Cover;

(d) circumstances which constitute Credit Default and the consequences of Credit Default; and

(e) Imbalance Party compensation arrangements in certain circumstances where errors have been made in calculations under Section M.

For clarity an Imbalance Party means a Trading Party or a Virtual Lead Party that holds a Virtual Balancing Account.


For the purposes of Credit Assessment Energy Indebtedness, the Credit Assessment Credited Energy Volume (CAQCE) for each Primary BM Unit in each Settlement Period is calculated. The calculation of CAQCE mirrors almost exactly the calculation of Credited Energy Volumes (QCE) in Section T, including taking into account any Metered Volume Reallocations. In order to calculate the CAQCE one of three values listed below will be used.

    • the Balancing Mechanism Credit Assessment Export Capability (BMCAEC) multiplied by the Settlement Period Duration (SPD) will be used for Primary non-Interconnector Production BM Units;

    • the Balancing Mechanism Credit Assessment Export Capability (BMCAEC) multiplied by the Settlement Period Duration (SPD) will be used for Primary Supplier Export Credit Assessment Load Factor (SECALF) qualifying BM Units;

    • the Balancing Mechanism Credit Assessment Import Capability (BMCAIC) multiplied by the SPD will be used for Primary non-Interconnector Consumption BM Units;

    • the Period Final Physical Notification (FPNij) will be used for Primary Interconnector BM Units; and

    • the Period Final Physical Notification (FPNij) will be used for Primary Credit Qualifying BM Units until the MAQCE is determined.

BMCAIC and BMCAEC are derived from the Demand Capacity (DC) or Generation Capacity (GC) respectively for the Primary BM Unit (determined under Section K) multiplied by the Working Day Credit Assessment Load Factor (WDCALF) or the Non Working Day Credit Assessment Load Factor (NWDCALF that applies for each Primary BM Unit. For Primary Supplier BM Units with a GC of greater than zero and a DC of zero, SECALF is applied. Both CALF and SECALF values are determined by Elexon in accordance with principles established by the Panel, albeit an Imbalance Party may request the Panel to re-determine values for one or more of its Primary BM Units. The principles are published on the BSC Website in the form of the CALF Guidance document.

The NWDCALF/WDCALF calculations can take into account Code specified Annual Holiday Periods relating to the Christmas/New Year and Easter public holiday periods, subject to BSC Party request. Lead Parties of SMRS registered Primary BM Units may choose to be assigned holiday WDCALF/NWDCALF values to apply a reduced load to Settlement Periods within an Annual Holiday Period. This is offset by all other Settlement Periods within that BSC Season.

For each Settlement Period, the values of CAQCE/MAQCE are summed for every Primary BM Unit belonging to each Imbalance Party, and the net MWh quantity of the Energy Contract Volumes notified to or from the two Energy Accounts of the Imbalance Party is subtracted, to give the Credit Assessment Energy Indebtedness (CEI) (or in the case of Credit Qualifying BM Units, Metered Energy Indebtedness (MEI)) in each Settlement Period. The sign convention of this quantity is such that when CAQCE/MAQCE is less positive or more negative than the net sum of two Account Bilateral Contract Volumes (QABC), i.e. as though the Imbalance Party is short and has not contracted for sufficient energy, the Imbalance Party's CEI/MEI will increase. When CAQCE/MAQCE is more positive or less negative than QABC, i.e. as though the Imbalance Party is long and will be spilling excess energy, the Imbalance Party's CEI will decrease.

Where an Imbalance Party is solely a Virtual Lead Party (VLP) that holds a Virtual Balancing Account the Credit Assessment Energy Indebtedness (CEI) and Metered Energy Indebtedness (MEI) shall be set to zero.

In addition to CEI/MEI values for each Settlement Period, the Actual Energy Indebtedness (AEI) is calculated for each Imbalance Party for each Settlement Day for which the Settlement Administration Agent (SAA) has provided details of Trading Charges calculated in the Interim Information Settlement Run. The value of AEI is determined by dividing the net amount of Trading Charges for each Imbalance Party by the Credit Assessment Price (CAP), in order to convert the indebtedness value from a financial amount to an energy value (measured in MWh).

The value of CAP is determined by the Panel (delegated to the Credit Committee), and determines the equivalent financial amount corresponding to a given amount of Energy Indebtedness (measured in MWh). The effect of CAP on the calculation of Imbalance Parties' indebtedness can be summarised as follows:

(a) In the case of CEI/MEI, the value of CAP has a material impact on the amount of financial indebtedness that corresponds to a given amount of CEI/MEI; and

(b) In the case of AEI, the value of CAP has no material impact, as the CAP value used to calculate AEI is the same one used to convert Credit Cover to Energy Credit Cover. The use of CAP in the calculation of AEI therefore represents an entirely nominal change of units, which is required in order to allow AEI values to be added to CEI/MEI values.

Having determined values of CEI/MEI for each Imbalance Party in each Settlement Period, and values of AEI for each Imbalance Party for each Settlement Day for which Interim Information data is available, the Energy Indebtedness for each Settlement Period then is calculated as a running total of the following values:

(a) The AEI value for each Settlement Day in the previous 28 Settlement Days for which an AEI value has been calculated; and

(b) The CEI/MEI value for each of the Settlement Periods in each of the previous 28 Settlement Days for which an AEI value has not been calculated; and for all the Settlement Periods in the current Settlement Day up to and including the Settlement Period in question.

Section M requires that Imbalance Parties acknowledge that errors can occur in the execution of the rules that it contains, and that the rejection and refusal of contracts in Section P will proceed nonetheless. Furthermore, Imbalance Parties are required to acknowledge that the Imbalance Party can avoid steps being taken in relation to the rejection and refusal of contracts, including by providing additional Credit Cover.

Credit Cover

Imbalance Parties may provide Credit Cover by delivering to the Funds Administration Agent (FAA) either by way of a Letter of Credit (LC), Approved Insurance Product (AIP) and/or cash. The amount of Credit Cover is then the total of the fiscal amount guaranteed in LCs, AIPs and/or cash provided by the Imbalance Party, less the amount of any Trading Charges that are unpaid but for which Payment is due (as covered in Section N). If the amount so determined is negative, the amount of Credit Cover shall be zero.

A LC and AIP must be valid for a duration of not less than three months and must be of the form given in Section M, Annex M-1, M-2 or M-3. Twenty Business Days before the expiry of a LC or AIP, the FAA is required to provide notice to the Imbalance Party. Not later than ten Business Days before the expiry, the Imbalance Party then must provide either confirmation from the issuing bank that the LC or AIP will be extended for at least a further three months or provide a new LC or AIP to replace the existing one. If this is not done then the FAA will immediately demand payment of the LC or AIP and hold the cash as Credit Cover instead. Similarly, if the issuing bank for a LC or AIP falls below the required "A" credit rating, the Imbalance Party has three Business Days to provide a replacement LC, AIP and/or cash cover, before payment is demanded under the existing LC or AIP.

Reduction of Credit Cover

An Imbalance Party which is not in Default, with the exception of an Imbalance Party in Default solely for insolvency reasons that has submitted a Withdrawal Notice and met all relevant withdrawal criteria, may reduce the amount of its Credit Cover. The Imbalance Party must first notify the Energy Contract Volume Aggregation Agent (ECVAA) that it wants to do so. After a ten day "waiting period", the ECVAA will determine a "minimum eligible amount" which is the amount of Credit Cover that would have resulted in a Credit Cover Percentage (CCP) of not more than 75% during the waiting period, and notify the Imbalance Party and the FAA of this amount. The Imbalance Party may then reduce the aggregate amounts of LCs, AIPs and cash provided for Credit Cover to not less than this minimum eligible amount.

A Non-Supplier Imbalance Party, which is in Default solely for reasons of insolvency and meets the criteria set out below, may seek the Panel's approval to reduce its amount of Credit Cover:

    • has no Notifications or Authorisations in force;

    • has paid all Trading Charges due;

    • has paid all BSCCo charges due;

    • has transferred or de-registered any Relevant BM Units; and

    • has had an Energy Indebtedness of zero or less than zero continuously over the previous 30 days.

Where Panel approval is received, a Non-Supplier Imbalance Party which has met the above criteria may reclaim a portion of its Credit Cover. The amount of the Credit Cover that is retained by the FAA, and cannot be reclaimed, is worked out from a calculation provided in Section M that looks at the Party in question's average positive reconciliation charges over the past year. The difference is returned to the Party.

In the event that an Imbalance Party provided additional Credit Cover as a result of a "level 1 default notice" issued by the ECVAA that was subsequently established to have been issued in error, then the waiting period is only one day and the minimum eligible amount corresponds to a CCP of 80% rather than 75%.

Energy Credit Cover

An Imbalance Party's Energy Credit Cover (ECC) is defined as the Credit Cover divided by the CAP determined by the Panel. ECC is a MWh quantity corresponding to the financial amount of Credit Cover such that the subsequent credit checking provisions of Section M can be applied in MWh rather than financial terms. Upon any change in the Imbalance Party's ECC, the FAA notifies the ECVAA and the Imbalance Party of that revised amount.

Credit Default Status

An Imbalance Party's CCP is the Energy Indebtedness expressed as a percentage of the ECC. In cases where the ECC is zero, default values of –1000%, 0% or +1000% are used, dependent on whether the Energy Indebtedness is less than, equal to or more than zero respectively. The CCP for each Imbalance Party in each Settlement Period is determined by the ECVAA as soon as practicable after the Submission Deadline for that Settlement Period.

For the purposes of the rules, the idea of CCP 'becoming greater than' a given value in a Settlement Period is defined as being where CCP is greater than that value in the Settlement Period but was less than (or equal to) that value in the preceding Settlement Period. "Becoming less than" is construed accordingly. Furthermore the BSC states that any action that the ECVAA is supposed to take in relation to changes in an Imbalance Party's CCP, if not done at the intended time, can be done later on.

Level 1 Credit Default

If the ECVAA determines that an Imbalance Party's CCP has become greater than 80%, Elexon and the Imbalance Party are notified of the fact by way of a "level 1 default notice". A Query Period, during which subsequent actions are put on hold to give an opportunity for the apparent credit default to be investigated, commences at the Submission Deadline for the Settlement Period for which the CCP became greater than 80%. The Query Period is a minimum of 24 hours after the Imbalance Party is treated as having been informed (in accordance with Section O) and must contain five consecutive Business Hours. During the Query Period, the Imbalance Party may query the ECVAA's determination of CCP, and may submit supporting evidence.

The ECVAA must investigate its determination. At the end of the Query Period, either the CCP will be corrected to a level below 80%, which leads to the level 1 default notice being cancelled (although a new level 1 default notice could still be issued in respect of a later Settlement Period if the Imbalance Party's CCP becomes greater than 80% for that later Settlement Period) or the original determination that the Imbalance Party was in Level 1 Credit Default will stand.

If the original level 1 default notice is confirmed then the Imbalance Party has until the end of the next Business Day following the Query Period to reduce its CCP to less than 75% for at least one Settlement Period in that interval (known as the "default cure period"). If this is not done then, subject to an authorisation by Elexon, the Imbalance Party is in Level 1 Credit Default and this fact will be published through the Balancing Mechanism Reporting Service ( or on the BSC website.

Where the Query Period has expired the Level 1 Credit Default will end when the CCP becomes less than 75%. Notice of this is also published.

Level 2 Credit Default

If the ECVAA determines for an Imbalance Party that CCP has become greater than 90% at the end of or after the Query Period then subject to an authorisation by Elexon, the Imbalance Party is in Level 2 Credit Default. Level 2 Credit Default gives rise to the possible refusal and rejection of ECVNs and MVRNs (as outlined in Section P) through the definition in Section M of "Credit Default Refusal Periods" and "Credit Default Rejection Periods" that follow from Level 2 Credit Default.

The Credit Default Refusal Period runs from the Submission Deadline for the Settlement Period for which CCP became greater than 90% (referred to as "Settlement Period J") and ends at the Submission Deadline for the Settlement Period after the one for which CCP becomes less than or equal to 90% again. Section P states that: during this period, only ECVNs and MVRNs which do not increase the Energy Indebtedness of the Imbalance Party in Level 2 Credit Default are accepted.

The Credit Default Rejection Period runs from the third Submission Deadline after the Submission Deadline for Settlement Period J to the Submission Deadline for the third Settlement Period after the one for which CCP becomes less than or equal to 90% again. In Section P, during this period, any Energy Contract Volume Data or Metered Volume Reallocation Data for any Settlement Period that increases the Energy Indebtedness for that Settlement Period of the Imbalance Party in Level 2 Credit Default will be disregarded, notwithstanding the fact that the ECVN or MVRN has been previously accepted.

Additional criteria also affect the definition of when Credit Refusal and Rejection Periods can or should apply, and thus when contracts and metered volume reallocations can be refused or rejected. These include:

(a) refusal does not start for Settlement Period J, or rejection for the third Settlement Period following, if credit checking for Settlement Period J is not completed within half-an-hour of the Submission Deadline for Settlement Period J;

(b) refusal cannot start before the completion of the first credit check that determines that CCP has become greater than 90% and, similarly, refusal stops when the credit check is completed for the Settlement Period for which CCP becomes less than 90%;

(c) if, after the Submission Deadline for a particular Settlement Period, credit checking is not completed within half- an-hour then the rejections that would otherwise have occurred for the third Settlement Period following will not take place. This ensures that Imbalance Parties get notice at least one hour before the Submission Deadline that contracts and metered volume reallocations for a given Settlement Period have been rejected;

(d) similarly, contract refusal is suspended until the ECVAA is able to complete credit checking within the required half-an-hour.

Where an Imbalance Party in Level 2 Credit Default exceeds 100% CCP and fails to reduce it below 90% within two Working Days, or an Imbalance Party exceeds 100% CCP whilst in Level 2 Credit Default six times in a rolling period of six months that Party will be in considered to be in Default under Section H of the BSC. For the purpose of monitoring such events, the ECVAA provides notices of a Party's CCP exceeding 100% to the relevant Party and BSCCo.

Authorisation by Elexon

For an Imbalance Party to be in Level 1 Credit Default following its failure to reduce CCP to below 75% or for an Imbalance Party to be in Level 2 Credit Default following CCP becoming greater than 90%, authorisation in respect of that Imbalance Party must have been given by Elexon. The Code prescribes timings upon which Elexon shall give such an authorisation unless it believes that there is material doubt as to whether, at the time, the systems and processes of the ECVAA are giving correct determinations of the values of Credit Cover Percentage for that Imbalance Party. These timings vary dependent on the circumstances of the Credit Default breach. If Elexon withholds an authorisation on the basis of material doubt, it must investigate the matter and promptly give the authorisation as soon as there is no longer any material doubt.

The Code identifies that an example of the kind of event that might constitute a legitimate case for material doubt would be a significant difference between the Trading Charges calculated in an Interim Information Settlement Run and those expected to be calculated in the corresponding Initial Settlement Run, but the grounds for when a material doubt may be called are not restricted to such circumstances.

The Panel has established, and may periodically revise, guidance on the principles upon which Elexon will establish the existence or absence of material doubt. These are contained within the Material Doubt Guidance, published on the BSC Website. It should be noted that whilst the Material Doubt Guidance provides general guidance on the principles that Elexon may follow in making a determination, it neither provides, nor aims to provide, an exhaustive list of circumstances where material doubt may be declared or the basis of evidence that may be used to support such a determination. Elexon retains discretion to apply material doubt in other circumstances.

If an Imbalance Party believes that a material doubt may exist in the future calculation of its CCP, it may elect to submit evidence in advance of this event to Elexon. Elexon is obligated to review the evidence as soon as practicable after receipt, and must subsequently verify any opinion formed in relation to such evidence as soon as practicable after receiving a level 1 default notice.

The authorisation for a given Imbalance Party lapses should the Imbalance Party's CCP become less than 75%, or if it is established that it was not in fact greater than 80% in the first place, or if Elexon considers for any other reason, e.g. the passage of time since the Query Period, that the authorisation should lapse.

It should be noted that BSCCo shall not give an authorisation notice to the ECVAA in relation to an Imbalance Party if the Party's Credit Cover Percentage is greater than 80% as a direct result of:

    1. that Party being subject to a direction given by the Secretary of State or action taken on behalf of Her Majesty's Government during a Black Start Period; or

    1. one or more of that Party’s BM Units being subject to a Network Gas Supply Emergency Acceptance.

Result of Trading Dispute

If a Trading Dispute reveals, or it is otherwise shown, that an Imbalance Party has been treated erroneously as being in Credit Default then that fact will be published on the BMRS website (, BSC Website, or both. The error, e.g. in the rolling calculation of Energy Indebtedness, will be corrected for all future credit checks. No retrospective correction of refusals and rejections will be attempted and the Imbalance Party will have no redress other than that provided by the Credit Cover Error Compensation arrangements.

Credit Cover Errors and Compensation

In certain circumstances where there is an error in the determination of the Credit Default status of an Imbalance Party, the Imbalance Party may be entitled to "Credit Cover Error Compensation". This compensation is paid by Elexon and is treated as a BSCCo Cost in Section D and hence will be recovered through BSCCo Charges rather than an adjustment to Trading Charges. The provisions are independent of any payment that may be made by the BSC Agent under its contract with Elexon in relation to the Credit Cover Error (e.g. liquidated damages, service credits etc.).

The Credit Cover Error Compensation is based on two amounts. The first, the "Credit Cover Error Interest Amount" is determined by calculating a cost for providing extra Credit Cover, as a result of the error, over and above the greater of:

(a) the amount of Credit Cover that the Imbalance Party should have had to have provided in order to keep its CCP below 80%; and

(b) the amount of Credit Cover that the Imbalance Party actually had in place at the time the error started.

The cost to the Imbalance Party of providing the additional Credit Cover is assumed to be 2% per annum above the rate earned on cash deposited with the FAA for the duration that the extra Credit Cover was required.

The second amount is the "Credit Cover Error Imbalance Amount" and is determined by calculating the cost of the energy imbalances that the two Trading Parties to a contract would incur collectively as a result of its rejection. This cost is calculated as the differential between System Buy Price (SBP) and System Sell Price (SSP) applied to the Credit Cover Error Rejection Volume (REJ). This volume is the aggregate of the rejected contract volumes including MVRNs (using BM Unit Metered Volumes from the most recent Volume Allocation Run and assuming a Transmission Loss Multiplier of one). If, however, the actual Account Energy Imbalance Volumes were lower than Credit Cover Error Rejection Volumes, then the compensation is capped to the actual Account Energy Imbalance Volumes.

Imbalance Parties are only entitled to receive the greater of either the Credit Cover Error Interest Amount, or the Credit Cover Error Imbalance Amount in relation to a particular Settlement Period, and only if this amount is positive.

Imbalance Parties must submit claims for Credit Cover Error Compensation within three months of the Settlement Day in which the error in determining CCP began, and only claims of greater than £1,000 over the entire period of the error are payable. Elexon must determine and pay any valid claim for compensation as soon as is reasonably practicable.

Section M: Annex M-1, M-2 and M-3

Annexes M-1 to M-3 provide examples of acceptable Letters of Credit and Approved Insurance Products. Any Letter of Credit and Approved Insurance Product provided by an Imbalance Party must substantially be in the form of one of the examples set out in Annex M-1 to M-3 (or another form approved by the Panel).

Need more information?

For more information please contact the BSC Service Desk at or call 0370 010 6950.

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