The electricity markets of Southeast Europe have undergone significant changes, particularly with the introduction of the Carbon Border Adjustment Mechanism (CBAM), which is set to take full effect in early 2026. Historically, the region’s power trading was characterized by substantial price differentials between coal-heavy systems in the Western Balkans and gas-driven markets in the European Union. This disparity allowed traders to capitalize on arbitrage opportunities, exporting electricity across borders and contributing to price formation and liquidity in the market.
However, the implementation of CBAM has fundamentally altered this landscape. The mechanism imposes a carbon cost on electricity imports into the EU, calculated based on default emission factors linked to the EU Emissions Trading System (ETS). In the first quarter of 2026, the average carbon price reached €75.36 per tonne of CO₂, resulting in effective import costs ranging from €70 to €86 per megawatt-hour for electricity sourced from coal-dominated systems in the Western Balkans. This additional cost has severely impacted profit margins, often eliminating them entirely.
The shift in market dynamics is evident when examining price spreads and cross-border flows. In a typical arbitrage scenario, widening price differentials should stimulate increased trade; however, data from Q1 2026 reveals a decline in cross-border flows despite price spreads exceeding €30/MWh, and in some cases surpassing €40/MWh. This disconnect highlights a new market reality where traditional trading behaviors no longer apply.
One notable example is the Montenegro-Italy corridor, where Southern Italy experienced day-ahead prices averaging over €130/MWh compared to Montenegro’s approximately €85/MWh. Under previous conditions, such a spread would have encouraged significant exports from Montenegro to Italy. Instead, both scheduled and physical flows decreased due to CBAM-related costs absorbing the price differential. Montenegro’s carbon cost of around €73–74/MWh effectively neutralized any arbitrage opportunity.
This trend is not isolated; similar patterns are observable across various trading interfaces within the region. For instance, at the Serbia-Hungary border—a historically active trading point—price spreads of approximately €31/MWh failed to generate anticipated export increases due to regulatory uncertainties surrounding CBAM compliance and reporting.
The implications extend beyond immediate trading activities, impacting overall trading strategies. Traditional arbitrage relies on predictable market spreads; however, with policy-driven adjustments now influencing these spreads, traders face an altered risk landscape that incorporates regulatory risks and carbon price volatility alongside conventional market factors like fuel costs and demand patterns.
Market participants have responded cautiously to these changes, as evidenced by cross-border capacity auction results indicating reduced forward commitments prior to CBAM’s full implementation. Auction prices for interconnection capacity dropped significantly—by as much as 24% to 67%—reflecting diminished expectations for future arbitrage profitability. Although daily allocation rates remained high, suggesting continued booking of capacity, its perceived value has waned.
Regional power exchanges have also shown divergent performance trends. While total traded volumes across the Western Balkans increased modestly—from 2.16 TWh to 2.39 TWh year-on-year—this figure obscures significant variations at individual exchanges. Markets with robust domestic generation capabilities, particularly those rich in hydro resources like Albania and Montenegro, saw substantial growth in trading volumes. Conversely, Serbia’s SEEPEX experienced an 11% decline as it transitioned away from transit-based trading towards generation-focused activity.
The decline of transit trading routes poses additional challenges for regional electricity flows. Traditionally serving as conduits for power movement between EU markets—such as Hungary through Serbia into Bulgaria—CBAM has introduced uncertainty regarding transit treatments that may subject these flows to carbon costs. Consequently, traders are increasingly avoiding routes involving the Western Balkans in favor of alternatives that either remain entirely within the EU or utilize low-emission systems.
This rerouting behavior not only impacts economic efficiency but also reshapes the geography of electricity trade within Southeast Europe. Regulatory considerations are becoming more influential than traditional economic factors when determining optimal trade routes, potentially leading to longer distances traveled or less efficient corridors utilized to circumvent carbon charges.
The diminishing role of arbitrage also affects interconnectors as financial assets within liberalized electricity markets. These interconnectors serve not just as physical links but also as tools for capturing price differentials; thus, their value is reflected in auction prices for capacity rights. As arbitrage opportunities fade, so too does market participants’ willingness to invest in these rights—a trend evident from declining forward auction prices noted at the end of 2025.
From a broader system perspective, reduced arbitrage-based trading introduces new challenges for balancing supply and demand across regions while smoothing price volatility and enhancing supply security. Constrained cross-border flows limit flexibility within the system and increase reliance on domestic generation sources that may not always be cost-effective or efficient.
The interplay between CBAM and EU ETS further complicates matters by linking carbon pricing directly to electricity trading economics. The fluctuations observed in EU ETS prices during Q1 2026 underscore how intertwined these markets have become; traders must now navigate both power price risks and carbon price risks simultaneously.
For coal-dependent systems in the Western Balkans, these developments present stark challenges as their competitive edge erodes under CBAM’s carbon pricing regime. While this aligns with broader decarbonization goals, it creates transitional difficulties for these markets that require time for investments in cleaner generation technologies or emissions reduction measures.
In contrast, low-carbon systems—particularly hydro-rich markets like Albania—stand to gain advantages by exporting electricity without incurring CBAM costs. However, this position remains contingent upon variable hydrological conditions that can affect long-term sustainability.
As Southeast Europe navigates this evolving landscape of cross-border power trading, adaptability among market participants will be crucial alongside potential refinements to the CBAM framework by policymakers. Clarity regarding transit flow treatment and adjustments to default emission factors could shape future trading strategies significantly while fostering regional carbon pricing mechanisms aligned with EU standards may help restore some balance between EU and non-EU markets.
The transition away from straightforward cross-border arbitrage is evident; while such opportunities have not vanished entirely, they are now more complex and closely tied to policy dynamics than ever before. This transformation marks a pivotal moment for a region historically reliant on cross-border trading for integration and efficiency.
