The increased volatility of electricity prices for Belgian households

Several studies have shown that the Belgian harmonised index of consumer prices for electricity (HICP-EL) has become more volatile since the end of 2007. The increased volatility can be observed not only for the past behaviour of the index, but also relative to other countries’ indices. A study of the National Bank of Belgium has shown that methodological changes in the method of registering the base data collected for calculating the index are not the only reason. It has concluded that differences in the price-setting behaviour in the deregulated electricity markets are a more plausible explanation for this volatility. The article analyses the Belgian price-setting mechanism in detail. Most households have signed variable-price contracts with their electricity supplier. The variable price in such contracts is aligned to suppliers’ costs using indexing parameters. One of the parameters reflects changes in wages and material costs (the parameter Ne), while other parameters follow the changes in fuel costs (several parameters are used, the most representative being Nc and Iem). These parameters are computed and published by the regulator on a monthly basis. The main findings in the article are that (1) the evolution of the HICP for electricity is strongly correlated with a linear combination of the above-mentioned parameters, (2) this linear combination is ahead of the HICP by one or two months, (3) the monthly indexation implies a fast transmission of the parameter changes to consumer prices, (4) the monthly price changes combined with the annual invoicing frequency increase the complexity and reduce the transparency, moreover, users have only ex-post knowledge about the price, which limits price comparability, and (5) the indexing formulae assume a fixed fuel mix. In practice, however, the fuel mix changes because suppliers switch their purchase contracts to other producers, because of fluctuations in relative fuel prices and because the composition of the production capacity is changing. Suppliers also entail costs that are not taken into account by the formulae (e.g. costs of greenhouse gas emission rights and green certificates). It is also worth mentioning that no signs of the existence of similar indexing mechanisms were found in neighbouring countries.