Natural gas market

Consumption of natural gas in Estonia in 2021 was 5,089 GWh/year(1), of which 9% or 468 GWh was consumed by households. Gas consumption in Estonia has been falling over the years and, due to the high price of gas, a further decline in consumption and a switch to alternative energy sources can be expected. Unlike in Western Europe, natural gas does not play such an important role in heating buildings. District heating is the most common form of heating in Estonia, where the use of gas has declined over the years and, at the high prices of today, will continue to do so. The consumer price of natural gas consists of three components: natural gas, network service, and excise duty. The price paid by the household customer is made up of four components and is inclusive of VAT. As with liquid fuels, the price of gas is set under free market conditions, the prices of network services are coordinated by the Competition Authority and the excise duty rate is set by law.


Natural gas price analysis

The Competition Authority analysed the reasons for the dramatic increase in natural gas prices and looked at the near-term outlook for natural gas demand and prices. In October 2021, the price of natural gas reached a record high on gas markets, even exceeding €100/MWh (TTF exchange price) on some days.

As a result of the analysis, the increase in natural gas prices in the Baltic-Finnish market region in 2021 is mainly influenced by low stocks in European storage facilities, constraints on Russian supplies to Europe and competition between Europe and Asia in the LNG market. Climate also played an important role, with extreme cold periods in different regions in winter and heat waves in summer.

This led to a situation where, in the unfolding world after the COVID-19 pandemic, consumption and energy demand skyrocketed while production fell. The price of natural gas in the Baltic region is closely linked to the price on the European market, and the European market is heavily influenced by the rest of the world, such as Asia and the US. This shows that the impact of demand and price of natural gas is becoming more globalised and that the effects of different regions of the world on energy markets are having a reciprocal impact on each other. The price in the Baltic region is correlated with the European market price and has been harmonising with the European market price since Q3 2020. 

While in 2019, the price of natural gas on the European market was in the about 3.5 €/MWh cheaper than on the Baltic market on an annual basis, then in 2020, the price difference had fallen to 1.45 €/MWh. In the first nine months of 2021, however, the price of natural gas was cheaper on the Baltic market and the price difference with the European market averaged 2.3 €/MWh over the period. The increase in natural gas prices in the Baltic region was therefore caused by price increases in the European market and global concerns.

From a competition point of view, the situation in the natural gas market has been improving over the years, and the market is becoming more globalised. LNG supply from the world market have improved competition for Russia’s share of gas and created a clear alternative to Russian gas. While before the war in Ukraine, it was rather hoped that the price increase in European markets would stabilise in 2022, it is now clear that we are more likely to see a continuation of very high gas prices and a change in the entire European security of supply towards LNG. While demand for natural gas in Europe is projected to decline after 2022, demand for natural gas will continue to grow in Asia and the Mediterranean. At this point, it is difficult to predict how much future demand in these regions will affect European markets and prices. The years 2020–2021 were exceptional in terms of both consumption patterns and climatic conditions, affecting all regions of the world. What is certain, however, is that the energy markets that have opened up are becoming increasingly globalised and that the Baltic market will increasingly be influenced by factors from more distant regions of the world.

As the impact of high energy prices on the economy and on households is being felt, the European Commission has put together a toolbox for Member States to mitigate the current extreme energy price hikes with a range of temporary measures. Households that are unable to buy energy and those with low and below-average incomes, who spend a higher percentage of their income on energy, will be hardest hit by price rises. In addition, high energy prices also have a significant negative impact on production, industry, employment, and prices.