Stress testing - cash flow index

Report notes

1. The spot price risk disclosure regime, commonly referred to as the stress testing regime, is described in Subpart 5A of Part 13 of the Code. Disclosing participants are required to apply a standard set of tests that assess aspects of a firm's financial position in response to changes in spot prices. Spot price risk disclosure statements are to be submitted on a quarterly basis to a person appointed by the Authority. That person then provides an anonymised summary of the disclosure statements to the Authority and it is these summaries that underlie this report.

2. The Authority makes no judgement about the different levels of risk tolerance exhibited in the stress testing results. Adopting risky positions is a legitimate strategy and the Authority hopes that the stress test regime will help ensure that these sorts of positions are being taken by decision-makers fully conversant with the potential consequences. Decision-makers are accountable for the impacts of their decisions even in the event that they lead to financial distress during times of scarce supply.

3. Two scenario types are defined: energy shortages and capacity shortfalls. Financial stress is assessed following exposure to:
   • energy shortage events that might give rise to periods of sustained high spot prices, and,
   • unexpected capacity shortfalls that might arise for short periods due to high demand.

4. The cash flow index tracks how cash flow are changing over time. The basis for reporting changes is the number of respondents reporting a positive cash flow in 2012 Q3 - this number has been indexed at 100.
   The change in cash flow in any quarter relative to the cash flow in the previous quarter is calculated for all respondents. The number of reporting respondents is then shown as a proportion of the 2012 Q3 positive cash flow number. Positive changes in cash flow are considered gains (blue bars) and negative changes are considered losses (red bars).

5. A guide has been prepared to assist with interpreting the stress test results.

6. Additional information about the stress testing regime can be found here. This information includes the purpose of the regime, what the stress test scenarios represent, and a set of answers to frequently asked questions.