Recent developments in South-East Europe’s power markets have highlighted a significant shift in how electricity pricing reflects system stress. January’s market dynamics revealed that day-ahead market (DAM) prices are no longer the primary indicators of supply-demand imbalances; instead, balancing energy and ancillary services have become the critical price-setters. This change underscores the growing importance of these services, which are clearing at higher prices and indicating earlier signs of scarcity than traditional energy markets.
In January, countries like Serbia, Romania, Bulgaria, and Croatia experienced notable evening demand spikes. Markets such as SEEPEX, OPCOM, and CROPEX reported peak DAM prices ranging from €170 to €300/MWh. However, these figures mask a deeper issue: balancing markets were operating near their technical limits. The high DAM peaks without concurrent fuel shortages suggest a depletion of available balancing reserves, indicating that the system is under strain.
The crux of the problem lies in the limited availability of controllable balancing reserves. In many South-East European systems, only 5–10% of installed capacity can serve as fast-acting balancing resources during peak winter hours. Most of this flexibility comes from hydroelectric sources, with gas and combined heat and power (CHP) units contributing minimally. Renewable sources such as wind and solar provide little to no support for upward reserves during January’s conditions, while demand response mechanisms remain largely underutilized. This scenario leads to a situation where balancing shortages appear before energy shortages, resulting in real-time marginal costs that significantly exceed those seen in day-ahead auctions.
The economic implications are profound, as imbalance prices often surpass DAM prices during periods of high demand. While the specifics of imbalance pricing vary across jurisdictions and settlement frameworks, January’s conditions suggest that effective imbalance costs reached between €300 and €500/MWh during peak hours. For traders and suppliers caught short in real-time operations, this situation can turn what seems like manageable DAM exposure into substantial financial losses post-settlement.
Romania serves as a pertinent example of this phenomenon. In January, OPCOM recorded an average baseload price of €150.51/MWh and a peak price of €176.60/MWh. However, the reliance on a narrow pool of hydro and thermal resources for balancing during evening ramps indicates that the true marginal cost of maintaining system security was significantly higher than the published DAM peaks. Consequently, balancing markets absorbed much of this scarcity rent.
Serbia exhibits a similar pattern but with distinct characteristics. SEEPEX reported peak days nearing €294/MWh, signaling stress within the system. Despite having a substantial hydro fleet, Serbia’s balancing capabilities are highly concentrated. When hydro resources are either reserved for water management or already allocated to DAM, the remaining balancing capacity becomes extremely constrained. This creates a precarious risk profile for suppliers: profits accrued during elevated DAM prices can be quickly negated by a few hours of imbalance.
In Croatia, the interplay between balancing resources and cross-border constraints plays a crucial role. When imports are feasible, the pressure on domestic balancing resources lessens; however, when interconnectors are congested, local resources must manage all demand increases. The average peak price on CROPEX in January was recorded at €165.66/MWh, which does not accurately reflect the true cost of flexibility required under these conditions—this is instead evident in reserve activation and imbalance settlements.
This evolving landscape has prompted a reevaluation of asset value among owners. Assets capable of providing balancing services are now commanding premiums that do not appear in day-ahead pricing structures. Hydro units with rapid response capabilities and gas units with flexible dispatch rights are capitalizing on scarcity in ways that traditional energy trading cannot match. In smaller systems where reserve depth is limited, participation in balancing markets has often yielded higher risk-adjusted returns than DAM arbitrage.
The implications for market participants are significant. A portfolio that seems adequately hedged within the day-ahead framework may still be vulnerable to structural shortfalls within the balancing market. January’s developments confirm that managing balancing risk has become paramount in South-East Europe’s power landscape; it necessitates physical flexibility rather than reliance solely on financial instruments. Failure to enhance participation in balancing services will likely result in continued extreme DAM peaks—not due to actual energy shortages but rather from fears surrounding real-time operational control.
