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How will your energy contracts be indexed next year?

How will your energy contracts be indexed next year?
Credit: Belga/Siska Gremmelprez

As most Belgian residents have now been obliged to switch from a fixed-rate to a variable contract for gas and electricity, many are wondering how their contracts will be indexed in the new year.

To provide some clarity on a question that many are anxiously pondering, RTBF ran some simulations in line with market dynamics to untangle the small print on energy contracts.

Taking the example of a contract with Engie Flow (other providers follow the same formula), the price of electricity is indexed monthly after taking an average of the daily Day Ahead EPEX SPOT Belgium (EPEX-DAM) quotes during the month of supply. Since this average is calculated according to the month that energy was provided, the amount by which bills will be indexed is not set until the end of the month.

Understanding the technical terms used at the bottom of your energy contract is essential to understanding why your final bill costs as much as it does.

EPEX-DAM? Belpex?

For variable contracts, the price of your energy changes every month (or every quarter) based on the stock market indexes. While this generally means that the amount you pay is dependent on the market, it also makes it difficult to know exactly what you will have to pay in the end.

Energy providers will use numerous indexes to calculate your final bill, such as the BELPEX-RLP, ENDEX-103, TTFDAW-RLP, or EPEX-DAM. While most of these capital letters mean nothing to the layperson, they are fundamental for estimating the final bill. In the example of the Engie Flow contract, the price per kWh for December is defined by the following formula: 3.0300 + 0.1085 x EPEX-DAM.

While Engie uses the index called 'EPEX-DAM', others such as the Commission for Electricity and Gas Regulation (CREG) call it the Belpex. Essentially, this name refers to the price of electricity on the markets for the following day.

To apply the calculation in real terms: Engie's EPEX-DAM is set at €180.41/MWh for November, which would come to a total of €22.60 cents/kWh, to which 6% VAT must still be added. Result: €23.961 cents/kWh.

Remember that for December, the final EPEX-DAM figure will only be known at the end of the month.

Two other factors in the formula

In addition to the cost of energy on the wholesale market, the indexation formula also includes two factors which together provide the supplier's margin to cover its fixed costs and generate revenue.

As one of the two factors is a multiplier, this part of the margin is proportional to the wholesale energy prices: as wholesale prices rise, the supplier's margin increases. The other factor is fixed, meaning that when energy prices fall, the supplier ensures a lower threshold, below which its margin cannot fall.

Customers wanting to compare tariffs would do well to keep an eye on these two factors. With prices on the wholesale markets roughly the same for everyone, these two "small" figures in the formula are what distinguish one supplier from another, effectively deciding which will have a lower profit margin and therefore cost you less.

ENDEX 101 and 103

These are not the only indexes that can be used to calculate a kWh of electricity, however: some operators also use ENDEX 101 and 103.

The first is "the arithmetic average of the Belgian Power Base Load Futures closing prices (business days except the last of the month) on during the month preceding the month of supply." The second is the same, but for "the month preceding the supply quarter" instead of just the month.

In practice, this means that when using ENDEX 101 and 103, the tariff is calculated based on an index and is applied for either one or three months.

To complicate matters further, some providers add a few euros to the index to pass the risk on to the customer. For example, at the Dats24 energy supplier, the index that amounts to €190.89/MWh is called 'BE_spotRLP'. This states that "Your consumption is divided into an hourly consumption according to the RLP (Real Load Profile), which is the arithmetic average of the profiles of the different distribution network operators (published by Synergrid). The average of the Belgian hourly prices weighted by the RLP gives the parameter BE_spotRLP."

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In most cases, Belgian households are equipped with meters that are read annually, meaning that the energy supplier cannot know the precise consumption month by month. Therefore, the supplier will take the overall consumption and "fictitiously" divide it up by month according to "consumption profiles" established and calculated based on the average consumption measured in the entire population.

An average family consumes 3500 kWh of electricity per year with a single-hour meter. According to Synergrid's calculations, 10.64% of their annual consumption (which comes down to 372.4 kWh) will be in December 2022. This is the amount of electricity that will be billed for the month in question, at the variable price in force at that moment.

"The Real Load Profiles are determined by Distribution System Operators (DSO) for electricity and for gas, but for gas it is the same for all the Energy DSOs," Synergrid explained. The RLPs are therefore not determined by consumption profile, but rather by geographical area.

Gas prices

Gas has its own specific indexes which most often are linked to the TTF (Title Transfer Facility) market – the virtual gas trading point in the Dutch market area. As with electricity, some contracts are linked to spot values and others to future values (for later delivery), for one or three months.

"TTF103 is a quarterly index. The TTF value for the next quarter (three months in the name TTF103) is based on the TTF quotations during the month preceding the quarter (the 1 in the name TTF103)," CREG explained.

The '0' in the name represents the number of months of difference between the month with the quotations taken into account and the quarter for which the TTF value is applicable. "For the TTF103 value in quarter Q1 of year Y, the quotes in the month before Q1 (i.e. December of Q4 of year Y-1) are taken into account."

In practice, this explains the spectacular rise in bills for "Easy" type contracts at the end of 2022: the very high price of gas in September has pushed this TTF 103 index to a record level.

Like with electricity, energy suppliers allocate annual consumption to each month with, logically, the highest consumption in December and January. Unlike with electricity, however, the gas RLPs are the same across the whole country.

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