Evaluating the FinEstLat gas market couplingUploaded: 1 of October, 2020

The FinEstLat merger and the related ITC mechanism is a unique and highly developed way of market integration in practice. The revenue redistribution applied is unparalleled in Europe and the preliminary results of the cooperation are greatly positive. This study provides insights to the first 6 month of the market merger, identifying and quantifying the possible beneficial effects of the market coupling.
In Task 1, we describe the workings of the FinEstLat merger and the revenue redistribution (ITC) mechanism applied. The FinEstLat merger itself meant the abolishing of bottlenecks between the markets involved by commissioning the Balticconnector, thus linking the Finnish, Estonian and Latvian markets, and in the same time setting internal tariffs in the region to 0 €/MWh and entry tariffs to the region at the same level. Revenues collected at the entry points to the FinEstLat region are re-distributed ex post based on actual consumption. This mechanism offers a transparent, easy-to manage solution and facilitates trade within the merged area.
In task 2, we provide an review of the merger based on actual market developments and outcomes. We assess the effect of the merger on the indicators and prices of GET Baltic, the organised market providing the trading background for the FinEstLat merger. We find that due to the increased integrated market area, the competition, traded volumes and concentration on these markets enhanced considerably. Due to data availability issues it was difficult to monetize or quantify all the possible benefits and give a concise evaluation on how much the FinEstLat merger benefited market players, consumers and other stakeholders such as TSOs. For this reason, another assessment was performed using mathematical modelling, which can identify the benefits of the merger per stakeholder and per country.
In Task 3, the European Gas Market Model (EGMM) was calibrated to simulate the 2018-2020 market situation in the Baltic countries and Finland. A base case with no coupling in place was set up, then the merger was introduced to this base case by the commissioning of Balticconnector and setting the tariffs to 0 €/MWh at the interconnectors within the merged area. Flows, prices, and welfare outcomes calculated by comparing the merged and non-merged case indicate that the merger brought high benefits for these markets. The benefits can be de-composed to a coupling effect, which shows that increased trade between the markets alleviates price differentials and price dispersion, and a competition effect, which means that a larger market area and better interconnectivity makes it more difficult for the main supplier of the FinEstLat region to engage in price discrimination. Effect of lower prices due to increased LNG deliveries, oil price link and lower European demand due to the COVID are not considered to be the effect of the merger but were also monetised.
In Task 4, we summarized our findings and formalized those in recommendations.