Natural Gas Market developments

Developments in the Natural Gas Market

2020 brought a number of major changes to the gas market. At the beginning of the year, the Estonian-Finnish connection Balticconnector started operating. As a result, a common market area of Finland, Estonia, and Latvia (FINESTLAT) was opened, which means a unique approach in Europe where there is no tariff restriction on the movement of gas within a region of three countries, and a common input tariff for the market area has been set in place. In addition, a common Estonian-Latvian balance area was launched with common standard terms and conditions, allowing market participants to trade in the area by concluding an agreement with just one system operator (TSO).


The Estonian-Finnish connection Balticconnector, with a technical capacity of 81 GWh/day, started operating at the beginning of 2020. However, it is important to note that Balticconnector’s capacity has not been fully utilised in the market, the problem has been that two compressor stations (Puiatu and Paldiski) have not been completed on time on the Estonian side (originally planned for summer 2020), the uncertainty surrounding the completion date of those stations remains in 2021. Therefore, only capacities of 29 GWh/day (36% of technical capacity) and 44 GWh/day (54% of technical capacity) were available on the Balticconnector route from Estonia to Finland and vice versa, respectively.

The strengthening of the Balticconnector and the Estonian-Latvian connection should presumably provide Finland with access to the Inčulkans gas storage facility and, after the launch of the Lithuanian-Polish connection (GIPL), enable the region to join the European gas network.

The Balticconnector project connects the Baltic and Finnish gas transmission networks with the aim of improving regional security of supply and creating a positive environment for the development of a functioning regional gas market. The larger regional market volume creates preconditions for additional supply chains, which will ensure the reduction of Russia’s influence in gas supply. Connecting markets through infrastructure will bring benefits through market integration and increased competition. By merging the markets, gas market prices are expected to converge in the Baltic States and to reduce possible geographical price discrimination in Finland from only having a single gas supplier. This can reduce the price of gas for the final consumer. A larger interconnected and open market also provides more opportunities for competing gas suppliers.

However, the full positive impact of the Balticconnector project on the market can only be seen when Balticconnector’s capacity becomes fully available on the market. During 2020, there has been a lot of dissatisfaction on the part of the market due to lasting restrictions, as the market’s need for trading has been significantly higher than the capacity provided so far and the market-favoured direction of capacity (Estonia–Finland) has been constantly sold out.

The Balticconnector project (worth 250 million euros, of which the European Union provided a financial contribution of 75%), built together by the Estonian and Finnish system operators, consists of the following parts:

  • Inkoo–Paldiski 77 km long submarine pipeline in the Gulf of Finland (pipe diameter 500 mm, maximum operating pressure 80 bar);
  • Siuntio–Inkoo 20 km long onshore pipeline in Finland (pipe diameter 500 mm, maximum operating pressure 80 bar);
  • Kiili–Paldiski 55 km long onshore pipeline in Estonia (pipe diameter 700 mm, maximum operating pressure 54 bar);
  • Kiili gas pressure regulation station;
  • Inkoo natural gas metering station with a compressor station;
  • Paldiski natural gas metering station with a compressor station.

An accompanying project of the Balticconnector project was a project to strengthen the Estonian-Latvian connection (worth 37 million euros, of which the EU provided a financial contribution of 50%), built by Elering AS and consisting of the following parts:

  • Karksi (two-way) natural gas metering station;
  • Lilli line valve station;
  • Puiatu compressor station.

The Karksi natural gas metering station and the Lilli line valve station were completed by the end of 2019, but the completion date for the Puiatu compressor station and the Paldiski compressor station has been repeatedly postponed throughout 2020. However, the Puiatu compressor station will likely be completed in the first half of 2021 and the compressor station in Paldiski sometime thereafter.

By the end of 2019, the pipeline was completed, this enabled the commissioning of the part-load system (up to 35 GWh/day) from 1 January 2020. After the completion of the Estonian compressor stations (Paldiski and Puiatu), it is possible to use the transmission capacity of 73.5 GWh/day. After additional repairs of the Tallinn-Vireš gas pipeline (2021–2022), the designed capacity of 81 GWh/day can be used.

In 2020, Balticconnector has been in active use, mainly transporting gas from the Inčukalns underground gas storage facility to Finland, and 87% of the capacity provided for trade to Estonia has been used.

Creation of the FINESTLAT market area

In co-operation with the Baltic and Finnish regulators (the Competition Authority, the Public Utilities Commission (LV), the National Energy Regulatory Council (LT) and Energiavirasto (FI)), an international tender was conducted in 2017 to find a consultant for the study ‘Creation of a price model of the natural gas entry-exit system for the single gas market of the Baltic States and Finland’.

As a result of the study, it was agreed to use the postage stamp starting price method in the Baltic and Finnish markets, as the study showed that the postage stamp starting price method provides the best social welfare for gas users, as the cheapest gas always gets on the market at equal entry prices.

As the Estonian, Finnish, and Latvian system operators could not reach an agreement with the Lithuanian system operator on cost compensation (ITC), a common market area was created in 2020 in co-operation between Finland, Estonia and Latvia (FINESTLAT market area). The main source of disagreement was Lithuania’s wish to receive compensation from other parties for investments made and to be made in Lithuania’s gas infrastructure. However, work to integrate Lithuania into the common market continues.

The FINESTLAT market organisation guarantees consumers market access to the gas markets of all three countries at the lowest offered gas price at regional entries, without additional costs at cross-border interconnections.

Estonian-Latvian common balancing area

Estonian-Latvian common balancing area was launched on 1 January 2020.

In order to launch the common balancing area, common Standard Terms and Conditions of the Network Rules and Standard Terms and Conditions of the Gas Balancing Rules were previously established for the use of the transmission network of the Estonian-Latvian gas area. The standard conditions were created by the system operators (Elering AS and AS Conexus Baltic Grid) and approved by the regulators (Competition Authority and Public Utilities Commission of the Republic of Latvia).

The advantage of a common balancing area is that the balance sheet imbalance is calculated on a regional rather than a country basis, which should lead to savings in balance sheet costs for the balance provider operating in both countries.

The Competition Authority approved the Standard Terms and Conditions of the Network Rules and Standard Terms and Conditions of the Gas Balancing Rules with its Decision No. 7-10/2019-007 of 30 September 2019 published (in English and translated into Estonian) on the website.

During 2020, the common Standard Terms and Conditions of the Network Rules were further supplemented and were approved by the Competition Authority’s decision No. 7-10/2020-001 of 23 April 2020 which entered into force on 1 June 2020.