Finland’s gas market, which opened at the start of the year, is working well. As much as 32% of the pipeline gas used in Finland between January and September was imported from the Baltic countries through the new Balticconnector pipeline under the Gulf of Finland. The rest came from Russia via the gas receiving station in Imatra, previously Finland’s only pipeline gas import connection.
The share imported through Balticconnector would be even higher if its full capacity were available. Only around 40% of its planned daily capacity of 72 GWh has been available this year, owing to delays in the construction of compressor stations on the Estonian side that increase gas transmission pressure.
Gas prices have been falling for some time
The decline in global gas prices began with reduced Chinese demand for LNG and accelerated in the spring as the Covid-19 pandemic reduced industrial gas consumption and created general uncertainty about the near-term outlook for energy markets. An exceptionally mild winter also depressed gas exchange prices in continental Europe early in the year.
Before the market opened, gas in Finland could only be purchased using the K-energy index for gas sales, based on oil (Brent) and coal (API2) prices and the domestic market basic price index (D35). In our price lists, this is abbreviated as Kei. Global oil and coal prices have fallen for the same reasons as LNG prices, so traditionally priced gas has also become significantly cheaper.
Since the start of the year, alongside gas priced using Kei -based pricing, Suomen Kaasuenergia has sold gas priced according to European gas markets. Our exchange-based products have been linked to Germany’s Gaspool gas trading hub. Another option has been pricing based on the Dutch Title Transfer Facility (TTF). Prices at these hubs track each other closely, so it makes little difference which one is used. Gaspool and TTF futures prices can be viewed, for example, on the Intercontinental Exchange’s ICE website by searching for “Gaspool futures” or “TTF futures”.
Exchange-based gas pricing uses front-month prices
Pricing based on European gas markets uses front-month prices: each month’s price is formed through futures trading during the preceding month. Exchange-based gas prices can therefore rise or fall quite quickly.
Prices for future months can be fixed at futures price levels, helping manage the risk of price fluctuations. A margin is added to realised front-month quotations when gas is sold. Its size depends on wholesale gas market conditions and the customer’s consumption profile. Gas selling prices also include wholesale transmission capacity costs charged to gas suppliers by the state-owned Gasgrid Finland Oy.
Realised front-month prices averaged approximately €15.5/MWh in 2019. This year they will average around €9.5/MWh, approximately 39% less than a year earlier. Exchange-based gas prices are generally higher in winter than in summer because demand is higher. Futures prices for the first quarter of next year are currently around €14.0/MWh, and around €13.0/MWh for the second quarter.
We have particularly recommended gas linked to European gas market prices for industrial and process users with reasonably steady consumption throughout the year, allowing them to benefit most from lower summer prices.
Gas prices based on the traditional Kei-index have fallen more slowly than exchange prices because they are based retrospectively on oil, coal and domestic market index prices over the preceding six months. The index was 0.87 last September and 0.63 this September, a fall of 27% over a year. It is currently 0.68 and is forecast to rise to 0.71 in December. The monthly gas selling price is calculated by multiplying base prices in our gas product price lists by the Kei-index. At present, gas linked to the Kei -index and Gaspool-based gas are priced at the same level.
Kei-index to be replaced by Suomen Kaasuenergia’s SK index
The only company supplying Suomen Kaasuenergia with gas at Kei -based prices will stop selling gas using Kei-based pricing at the start of 2021. We will therefore replace the Kei-index with the SK index developed by Suomen Kaasuenergia. It is based on Gaspool forward prices, which we fix during the three months preceding delivery. This makes the SK index considerably more stable than pricing based on a single Gaspool front-month price. Another benefit is that customers are informed of the SK index value one month before it takes effect.
Our customer letters at the end of November will explain the index change in more detail. You can also read more about the SK index. Customers do not need to take any action.
The gas price forecast for next year based on Gaspool monthly prices and the SK index is currently slightly below the forecast prices based on the Kei-index, which will cease to be used at the end of this year.
If you would like more information about gas pricing or a gas supply quotation, please contact our sales team.
Wishing you all the best for the rest of the year!
Pekka Karinen
Gas procurement and portfolio management