This is our first gas market review, covering current developments, gas prices and new gas users. It is aimed at our largest customers but will be useful to anyone interested in the gas market and price trends.
We will publish similar reviews every three or four months, depending on developments.
Finland’s gas market opens in a year
Finland’s natural gas market will open to competition at the start of 2020. Next year will therefore still follow the old model: Gasum is responsible for imports, high-pressure transmission and wholesale supply, while gas distribution companies or local energy companies distribute gas in their areas. Finland has around 20 gas distribution operators.
Retail gas pricing and the outlook for 2019
For around 20 years, gas retail and distribution pricing has been based on the permitted return set by the Energy Authority and public price lists approved by it.
Suomen Kaasuenergia serves many different user groups, so it has several price lists. These use the indexing applied to Finnish wholesale gas prices, linked to global oil (Brent) and coal (API2) prices and the domestic market basic price index (D35). Former Lahti Energia customers are an exception: for the time being, they have a fixed gas price reviewed as necessary in response to market changes.
Oil, coal and domestic market indices change monthly. The weighted monthly base index uses 40% oil, 30% coal and 30% domestic market basic price index. The billing index is the average of the weighted base indices for the preceding six months. This spreads pricing across two fuels and one basic price index, as well as over six months.
Suomen Kaasuenergia’s product price lists show the gas base price. The price on a gas bill is obtained by multiplying this by the billing index.
The indices underlying gas pricing are public. Brent crude and API2 coal prices can be followed on the ICE website, for example: Brent Crude Futures and API2 Rotterdam Coal Futures. The D35 domestic market basic price index is available on Statistics Finland’s website.
This pricing model allows gas prices to follow alternative fuels while remaining competitive and stable.
Normally, the three indices move in different directions and at different speeds, smoothing gas price changes. Strong global economic growth over the past two or three years has, unusually, pushed all three upwards. The total gas price includes transmission and excise duty as well as the gas selling price. Changes in the gas selling price affect 30–40% of the total price.
Economic growth has slowed since summer, causing oil and coal prices to fall. This is already beginning to show in gas prices. During late autumn and early winter, falling commodity prices have reduced the forecast annual average billing index for next year by around 10–15%.
Natural gas market opening in 2020
Finland’s wholesale and retail natural gas markets will open to competition at the start of 2020, when the Balticconnector pipeline linking Finland to the Baltic gas network comes into service. In practice, natural gas users will be able to choose their supplier freely.
Increased competition generally leads to lower prices in any market. We believe the same will happen in gas.
After the market opens, gas can be sold using different pricing models, even tailored to individual customers. Under the current model, both wholesale and retail prices must be public and approved by the Energy Authority. The change will let users buy gas with pricing suited to their needs. New alternative indices are likely to become available alongside the current index package, possibly with fixed-price products too—for example, a price that stays the same for a year.
Preparations across the gas sector have progressed well, although much remains to be done. Over the past year, operators and authorities have worked together on market rules and a wholesale structure meeting the Natural Gas Market Act’s requirements. The rules are nearly ready, but final details and implementation still require considerable work.
We have actively participated in preparations and begun renewing our own gas sales products and distribution tariffs. The wholesale transmission market structure will become substantially simpler and treat wholesale market participants more equally.
One significant improvement is the removal of the wholesale transmission charge based on gas volumes in each locality. This change alone is likely to reduce distribution prices for Suomen Kaasuenergia’s current customers by several euros per MWh.
Overall, we estimate that the market opening will benefit our customers by around 10–15% of the total delivered gas price. This will considerably improve gas’s competitiveness against other energy options. We view the opening very positively and believe its benefits and opportunities will significantly invigorate the market.
Future reviews will report on progress towards the market opening. We will be happy to answer current and prospective customers’ questions about the opening and its effects.
Pekka Karinen, Sales Manager, Suomen Kaasuenergia Oy
Suomen Kaasuenergia is a leading gas distribution and retail company that also offers a wide range of gas-based energy solutions. It operates in 15 locations in southern Finland and is Finland’s largest gas retailer and distributor by customer numbers (28,000), gas sales (90 million m³) and pipeline length (900 km). Its long history dates back to the 1860s, when Helsinki’s first gas lights were lit.