Report on the Liberalisation of the Estonian Gas Market is Released

The report on Estonian gas market commissioned by Elering from Pöyry Management Consulting analyses how the Estonian liberalised gas market could be designed. The report identifies that development of the local market will require not only full ownership unbundling of the gas transmission network, but also a package of measures, the most important of which will be to ensure the access of competing gas suppliers to the local market through a liquefied natural gas (LNG) terminal.

The report found that the liberalisation of the Estonian gas market will need many important steps to be taken, the central one being the full ownership unbundling of the gas transmission network. It will also be necessary to change the current paradigm where low demand means there is little incentive for suppliers to sell in the gas market, while at the same time the single supplier and supply chain mean that the chance of gas being used more widely is limited. To resolve this dilemma will need carefully considered steps to be taken in parallel to find new opportunities for using gas and to support the development of alternative supply chains and the arrival of new sellers in the marketplace. The best way to achieve this is to build a LNG terminal and to connect the gas markets of the Baltic states and Finland and establish new types of market models.

This should result in a regional market and increased competition in Estonia, and should lessen the dominant position of one single market participant in the whole value chain of the local gas business. It will also have a significant impact in improving skills elsewhere in the gas industry. All this should increase significantly not only the security of gas supply, but also Estonia’s energy security as a whole. The report’s authors recommend that the majority of activities should be completed by the end of 2015, when Estonia’s contract with Gazprom expires.

Taavi Veskimägi, the CEO of Elering said that in terms of energy security, it is ever more important to treat gas and electricity together as the importance of gas as a source of energy keeps rising. This is what the European Union’s energy policy aims towards, covering the development of the gas and electricity markets together. “Experience this far in Estonia and in Europe has shown that in order to achieve control over industries that are highly monopolised by their very nature, the state’s role just as a regulator is not enough. And for energy markets to be efficient it is necessary that the regulator and the system operator follow the widest public interest in their actions. The separation of transmission networks in Estonia from sales and production operations can only be effective if the state retains ownership control over the networks and if the company responsible combines public and private functions having no direct market interests,” he said. He added that Elering’s experience after separation from Eesti Energia (Estonian Energy) clearly confirms this, and that in future the best model for Estonia would be combined operation of the transmission systems for electricity and gas.

The lower environmental impact of natural gas compared to that of other fossil fuels is making gas more and more attractive as a source of energy around the world. The development of the gas markets will also encourage the expansion of the transport of LNG and the wider use of shale gas around the world.

In connection with the development of the global gas industry, the Estonian government asked Elering to set up natural gas related competence in the company and to analyse the possible developments for the gas market. This May, Elering ordered an analysis of the arguments for and against the liberalisation of the gas market and an action plan of the next steps required by the liberalisation programme from tender-winner Pöyry Management Consulting (UK) Ltd. The project took in consultations with other ministries and other state agencies and various market participants, including Eesti Gaas (Estonian Gas).
This is the first ever published analysis about the development of gas market in Estonia and will serve as the basis for future activities.

The European Union’s third energy package requires that from 2014 there should be a functioning single European market for electricity and gas. The main aim is to create effective competition in the electricity and gas industries and equal treatment of all parties. The central part of achieving this is the ownership unbundling of transmission systems from production and sales. Although Estonia has a derogation from the directive’s ownership unbundling requirement, this is not absolute in nature, and domestic law can apply equivalent requirements to those of the directive.

The report on the Liberalisation of the Estonian Gas Market can be found on Elering’s website. The report can also be distributed in printed format on request.