Competition brings dynamics to gas markets

For more than 40 years the natural gas consumed in Finland has come from Russia via pipelines. The use of liquefied natural gas (LNG) and biogas in transport and industry is growing but, in the fast evolving energy sector, markets that rely on the traditional transmission system need to be developed as well. Among the main challenges in the sector is the diminishing total demand for gas, partly due to competition with other fuels.

The construction of the Balticconnector gas pipeline between Finland and Estonia means a historic opportunity to open the markets and integrate into the European market. Considering where we stand now, however, this must be done systematically and with special care.

New infrastructure is the key

Over the decades alternative sources of gas have been sought from pipelines to be constructed through Sweden or from a large LNG terminal of our own. These plans have collided with the reality, mainly finances, and the gas import monopoly has prevailed.

Balticconnector would also not have been started as a purely commercial enterprise, but financial support from the EU was needed. The purpose of support from the EU’s Connecting Europe Facility is to get rid of isolated markets and develop the internal market and security of supply by enabling new sources. The pipeline to Estonia and strengthening the Baltic networks makes it possible to utilise the Klaipeda LNG terminal in Lithuania and the large gas reserve capacity in Latvia, as well as connections to Poland later on.

The quite exceptional decision of the European Commission to grant the maximum support of 75%, EUR 187.5 million, to the Balticconnector project was a condition for the Finnish Government to capitalise the project by EUR 30 million.

As a logical consequence the Government stated in the National Energy and Climate Strategy that the Finnish gas markets will be opened for competition in 2020 when the pipeline is ready. This also requires that the commercial and network activities of the national gas company Gasum are unbundled to ensure fair and equal conditions and prevent cross-subsidisation.

Competition vs monopoly

The transmission of gas is a natural monopoly, with the state regulating the returns collected from it. Instead, the import and sale of gas remain commercial monopolies only if there are no significant competing sources. From the economic theory perspective monopoly obviously leads to inefficiency compared to a competitive market.

In practice the situation on the gas market is more complex. The main issue is that, in circumstances where the demand is diminishing, the markets are opened for competition with caution while promoting the advancement of the gas sector in the long term. This is a key premise in the legislative proposal we have given, which also includes a clear time frame to allow the companies to prepare for changes in the operating environment. Any ambiguity in the regulation would be directly reflected in the companies’ willingness to invest and other activities. The act is to enter into force in 2018. The separation of Gasum’s activities and opening the markets are scheduled to take place in 2020.

The EU Directive on the internal market in natural gas provides the judicial arguments in support of the economic reasoning, which alone is also sufficient. The derogation concerning the requirement to open the markets Finland now applies under the directive is no longer valid when 25% of the demand can be covered by alternative sources. This should take place in 2020.

 The way we implement the act is decisive

The proposed Natural Gas Market Act provides a comprehensive set of rules concerning the organisation of the market and operations. In the same way as on the electricity market, one of the main reasons for this is the dependence of trade on the network infrastructure and common platforms. On the other hand, the price regulation we have now will be abolished.

In unbundling Gasum’s activities the so-called effective separation should be applied where the new companies are clearly separated from each other. This is an open and practical approach in terms of the customer companies and other suppliers, as well as the companies to be separated.

Balticconnector was established as the project company to design and construct the pipeline between Finland and Estonia. However, the Finnish gas transmission network and the related services must be developed as a single entity. As time goes by it will be practical to merge the state-owned network company to be separated from Gasum and the Finnish ownership to the connecting pipeline.

Markets with the Baltic states?

According to the act, a connected market is to be created with the Baltic countries. Further deepening of the integration through a shared market model would require an agreement between the states as an outcome of joint negotiations. Nobody forces this onto us, but we should take the time to assess what is in our best national interest. In any case, it is important for Finland to participate in the processes that may lead to a future market model.

Integration and efficient functioning of the market requires investments in the networks of the three Baltic states as well. Finland has no obligation and will not contribute to the funding of projects which have no evident benefits for us. The Government has confirmed this principle by its decisions.

We must look ahead!

Natural gas is cleaner than other fossil fuels in terms of both greenhouse gases and particulate emissions. In the big picture for the coming decades the main value in using natural gas is in emission reduction. The development of LNG as a transport fuel in particular and utilisation of biogas work in the same direction. In many industrial processes, however, gas is clearly the best option. The importance of natural gas as a flexible fuel may also grow, for example, due to the supply and demand elasticities of the electricity market.

We must take all the benefits we can get from the integrating markets. Opening the competition in a way that is clear and systematic is the key to success. We must not get stuck with the old but go for something new.

Writer Riku Huttunen is the Director General of the Energy Department of the Ministry of Economic Affairs and Employment