Contract Refusal Contract Refusal is a process associated

Contract Refusal • Contract Refusal is a process associated with participant’s ex-ante trading behaviour; • It relates to how the Traded Not Delivered element is included in a Participant’s Required Credit Cover amount; • Traded Not Delivered is calculated from a Participant’s ex-ante trading and takes account of the impact of any sales / purchases with a SEM NEMO on imbalance risk; • For purchases, it reduces a Participant’s RCC while for sales it increases it; • For sellers in the ex-ante markets, they need to have collateral posted with SEMO to meet potential non-delivery of their sales; 1

Contract Refusal • Where RCC is above Posted Credit Cover, a Credit Cover Increase notice is applied; • Under the Code’s current drafting, when a CCIN is applied – – A participant must react within two working days before suspension processes begin; – A participant must react within the Response Period (a period of 5 continuous hours within a working day) before SEMO would begin start to refuse notification of further ex-ante contracts from SEM NEMOs relating to this participant; • Intent of this is to limit any additional risk being amassed in the event that the CCIN is not acted on; 2

Contract Refusal • Final design of Contract Refusal process was only finalised during the consultation process in early 2017; • By this time, imbalance settlement systems were already in build phase; • View from vendor was that applying this change would negatively impact on implementation timelines; • SEMO undertook an impact assessment to assess if a manual workaround could be applied; • Found that this would also need support IT systems to be procured and developed; • Resulting view that this functionality will be delivered as a “Day 2” change 3

Contract Refusal • Impact of non-implementation – • If a CCIN is not acted upon within the first 5 consecutive hours, additional sales will continue to be accepted, potentially increasing the non-delivery risk; • However, the application of the Response Period means that SEMO can take no action potentially for up to one working day after the issue of a CCIN (e. g. , if a CCIN is issued after the 12 noon credit check, the 5 continuous working hours starts at 9 AM the following morning and does not expire until 4 PM); • As a result, the additional risk is one extra day before SEMO begins the suspension process; • Once participants put in place the Required Credit Cover that reflects their normal trading pattern, likelihood of a CCIN driven by the Traded Not Delivered element is minimised; 4

Credit Cover Increase Notice Credit Cover Report published containing CCIN value 1 st Working Day 2 nd Working Day 17: 00 Three credit assessments daily • There are three credit assessments run daily • Where there is insufficient credit cover, a Credit Cover Increase Notice applies • A participant must remedy this within 2 working days • At any stage within the 2 Working Days a Participant can: • Submit increased collateral • Pay Bill(s) (before due date if necessary) • Use ex-ante markets to offset volumes 17: 00 If a CCIN is not remedied by 17: 00 2 WD, Participant in Default & will be Suspended from the Market 5