Baltic market integration takes a step further [NGW Magazine]

Steps to integrate the gas markets of Finland, Estonia and Latvia have borne fruit in recent years. Estonia and Latvia have formed a common balancing zone, effective since the beginning of this year. Finland remains a separate balancing area but is part of the common entry tariff area with Estonia and Lativa. Lithuania is the odd one out; despite being active in the market merger planning over the years, it did not sign up to the key agreements because of a disagreement on the compensation mechanism between the gas transmission system operators.

Lithuania therefore has a fully separate entry-exit system for tariffs. However, this could be about to change: in April, the four nations signed a roadmap agreement which sets out milestones to fully integrate their gas markets by 2022.

“Market integration is an opportunity for the Baltic states and Finland to make the best use of the existing and future infrastructure [...],” the roadmap said. “It is also a chance to increase competition to the benefit of the end-consumers in the region by attracting suppliers which otherwise will not come as the separate markets are relatively small.”

The roadmap has the blessing and support of the European Commission which has helped finance key infrastructure projects in the region, including the 2.6bn m³/yr Balticconnector between Finland and Estonia and the 2.4bn m³/yr Gas Interconnector-Poland-Lithuania (GIPL), to the tune of €187.5 ($206)mn and €305mn respectively. The Finland-Estonia pipeline has partly been operating since the beginning of the year while GIPL is expected to be commissioned by end-2021.

Security of supply

The four gas markets are small seen in isolation, but combined they account for around 7bn m³/yr of consumption. Considered ‘energy islands’, the region is historically very dependent on Russian gas although the completion of the Klaipeda Independence FSRU LNG terminal in Lithuania in 2014 has reduced this dependency. Around three quarters of the LNG imported by the 3.7bn m³/yr terminal in the fourth quarter of 2019 was of Norwegian origin. But still about a tenth was Russian LNG, according to the European Commission’s most recent report on gas markets.

The completion of the GIPL pipeline could also allow the Baltic states and Finland to import LNG from the 7.5bn m³/yr Swinoujscie LNG terminal in Poland as well as Norwegian gas via Denmark when the 10bn m³/year Baltic Pipe is completed, possibly in October 2022. Equally, it would allow the region to import piped gas from other sources via Germany.

A senior manager at Baringa Partners Erik Rakhou told NGW that the GIPL pipeline is not just about bringing gas from Poland further into the Baltic region or vice versa, but opening up the region for other opportunities such as importing piped gas via Germany and Ukraine’s upstream. “The project should be seen from a holistic perspective,” he said.

Creating a common tariff system across the four nations should boost competition and lower gas prices, but demand for the fuel seems unlikely to change radically owing to the increasing share of renewables. In 2018, renewables accounted for over 40% of final energy consumption in Finland and Latvia, 30% in Estonia and 24% in Lithuania – all exceeding their binding 2020 EU targets, according to Eurostat. Moreover, biofuels have also replaced gas in heating over the last few years.

“The aim is to boost market liquidity across the Baltic region including in Finland. However, it is probably not realistic that gas demand in the region will remarkably increase due to the penetration of renewables. Industry will continue to use gas as before, but we expect a decline in the power sector,” Balticconnector CEO Herkko Plit told NGW.

The current available capacity – under 50% – has been almost fully booked since the start up in January. Maintenance on the Latvian side of the Estonia-Latvia interconnection meant that flows were reduced during most of May. Energy companies in Estonia and Finland had asked maintenance be delayed until next year and said the short notice period given was not in line with EU law. Nevertheless, the repair work has now been completed although more is scheduled for autumn.

One key strategic importance of the Balticconnector is that it enables Finland to access Latvia’s 4.4bn m³ Incukalns storage facility via Estonia. That means shippers in Finland can inject gas into storage during summer months and withdraw during winter peaks.

“The Balticconnector has already contributed to lower gas prices on the Finnish market even though it is not yet in operation with full capacity. In the longer term, we are also hoping that the pipeline will transport biogas and hydrogen,” said Plit.

Next steps

Despite progress, plenty of work remains to better integrate the Baltic and Finnish markets and to increase the number of shippers. It is worth noting, for example, that incumbents such as Eesti Gas in Estonia, AB Achema and UAB Lietuvos in Lithuania as well as state Gasum in Finland boast significant market shares.

The TSOs have already started technical discussions on market design for a joint tariff area between the four nations. That includes analysis of how the removal of entry and exit tariffs on the Latvia-Lithuania border would have an impact on wholesale gas prices and end-consumers. Design of a compensation mechanism for transmission system operators (TSOs) is foreseen in the third quarter of next year. An agreement on the latter is expected by the end of this year or the beginning of next year. Meanwhile, the national regulators are expected to approve a tariff methodology by the end of the year, taking into account the opinion of the Agency for the Co-operation of Energy Regulators (Acer). The joint tariff area should be in operation by 2022. 

With regards to balancing, the roadmap says the Regional Gas Market Co-ordination Group – ministers, regulators and TSOs – will this spring analyse potential bottlenecks on the Kiemenai interconnection point on the Lithuanian-Latvian border and the impact of the additional capacity constraints in setting up a common balancing zone. Investigating bottlenecks on the Balticconnector interconnection point and the impact of the capacity constraints in setting up a common balancing zone will also be analysed.

After further analysis regarding the various options of extending the Estonia-Latvian balancing zone to Lithuania and Finland, a final proposal will be tabled by the end of the year.

Electricity integration

Further integration of the Baltic and Finnish gas markets is an objective under the Baltic energy market interconnection plan (Bemip) which also promotes integration of electricity markets. The Bemip members are the European Commission, Denmark, Germany, Estonia, Latvia, Lithuania, Poland, Finland and Sweden. Norway participates as an observer.

Improved integration with the Nordic electricity market has been enabled thanks to EU-backed infrastructure projects, such as Estlink, Nordbalt and the LitPol interconnectors, connecting the three Baltic States with Finland, Sweden and Poland.

Moreover, in June 2018, Lithuania, Latvia, Estonia and Poland together with the European Commission endorsed a political roadmap for synchronising the Baltic States' electricity grid with the continental European network by 2025. The grid is synchronised with the systems of Russia and Belarus.