The implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) is increasingly impacting the energy landscape in the Western Balkans, revealing significant disparities between national power systems. Montenegro’s state-owned utility, Elektroprivreda Crne Gore, has reported a loss of €13 million in the first quarter of 2026 due to immediate financial repercussions from CBAM. In contrast, Serbia’s Elektroprivreda Srbije (EPS) is grappling with a more complex situation characterized by a delayed but potentially larger financial exposure linked to its generation model and industrial connections.
This divergence stems not from differences in policy timing but rather from the structural architecture of each country’s power system. Montenegro’s smaller, export-oriented electricity market has already felt the brunt of CBAM, while Serbia’s electricity sector remains largely focused on domestic consumption, with exports constituting roughly 10% of total production. This domestic absorption has shielded EPS from immediate cash outflows related to CBAM; however, it also conceals deeper vulnerabilities that are beginning to emerge.
Central to Serbia’s exposure is its reliance on lignite for electricity generation. EPS operates over 4.3 GW of lignite-fired capacity, making it one of Europe’s most emission-intensive electricity producers. The carbon intensity associated with this generation translates directly into costs under the CBAM framework. Analysts project that exporting Serbian electricity to EU markets could incur additional carbon costs ranging from €50 to €60 per megawatt-hour (MWh), which threatens to undermine competitiveness in a market where wholesale prices have recently averaged between €90 and €110/MWh. The resulting cost differential risks excluding Serbian electricity from the EU merit order during many trading periods.
The implications extend beyond mere profitability; they signal a gradual erosion of market access for Serbian exports. While Montenegro is experiencing tangible financial impacts, Serbia is accumulating what can be termed latent losses—costs not yet visible in financial statements but embedded within future trading constraints and pricing mechanisms for industrial outputs. Estimates indicate that Serbia’s exposure related to CBAM could reach approximately €200 million annually, with broader economic ramifications exceeding €250 million when indirect effects are considered.
Understanding these indirect effects is crucial, as CBAM encompasses not only cross-border electricity flows but also the carbon intensity embedded in exported industrial goods. In Serbia, sectors such as steel and chemicals are closely linked to electricity consumption, making EPS’s emissions profile a critical factor influencing overall pricing across the economy. As such, electricity serves as a conduit for carbon costs throughout the export sector.
The feedback loop created by carbon-intensive generation raises implicit electricity costs, which subsequently affect the embedded emissions of industrial exports entering the EU. This results in a compounded competitiveness penalty that extends beyond EPS itself, reshaping profit margins across various industries in Serbia.
Montenegro’s recent €13 million loss illustrates this dynamic effectively. It reflects both direct and indirect consequences of CBAM, including diminished export pricing and shifts in trading strategies aimed at avoiding EU carbon exposure—even if it means accepting lower realized prices. Meanwhile, Serbia is gradually adopting a similar approach, with EPS considering pivoting exports toward non-EU markets within the Western Balkans as a short-term strategy to sidestep CBAM implications. However, this option is limited by smaller regional markets that are less liquid and typically priced lower than EU benchmarks.
Over time, this strategic shift may transform EPS from a marginal exporter to a regional balancing utility, decreasing its vulnerability to price volatility in interconnected European markets. Nevertheless, this transition comes at a time when capital requirements for infrastructure development are escalating. EPS has proposed investments in renewable energy sources, including around 1 GW of solar capacity and new wind projects, alongside the long-awaited Bistrica pumped-storage hydropower project. These initiatives are increasingly linked to maintaining market access under CBAM regulations.
Each additional megawatt of low-carbon generation contributes to lowering the average emissions intensity of Serbia’s power system, thereby reducing its effective CBAM burden. Conversely, delays in deploying these renewable projects could exacerbate future costs as carbon price differentials between Serbia and the EU remain wide—currently estimated at €50 to €60 per tonne of CO₂.
The timeline for realizing these impacts remains uncertain. Full financial settlements under CBAM will commence only in 2027 for emissions associated with exports made in 2026. Until then, utilities operate within a transitional framework where market behaviors are evolving even as cost realizations remain deferred.
This lag presents EPS with a finite opportunity to adjust its generation mix and investment strategy before full-scale CBAM costs materialize. Additionally, it introduces ambiguity into current financial reporting since true carbon exposure costs are not yet fully captured in earnings statements.
From an investor standpoint, EPS occupies a unique position compared to Elektroprivreda Crne Gore (EPCG), where CBAM effects are already evident in quarterly performance metrics. The risk profile for Serbia’s utility appears forward-loaded, suggesting significant implications for medium-term profitability and valuation.
At a systemic level, these developments challenge Serbia’s historical role as a low-cost regional electricity exporter reliant on lignite generation. The introduction of CBAM effectively undermines this competitive edge by internalizing carbon externalities and necessitating a comprehensive repricing of the entire energy model.
This transition signifies not only shifts in generation technology but also changes in market positioning. Serbia is evolving from being an exporter benefiting from low costs toward an energy system where competitiveness hinges on carbon efficiency and integration with EU market frameworks.
The early loss reported by Montenegro serves as a concrete benchmark for understanding how these transitions manifest in practice. For EPS, similar figures have yet to materialize on balance sheets; however, underlying trends indicate that when they do appear, they will reflect broader adjustments spanning power generation and impacting Serbia’s overall export economy.
