The implementation of the Carbon Border Adjustment Mechanism (CBAM) is significantly altering the landscape of electricity trading in South-East Europe. Historically, the region’s power exchanges were primarily influenced by generation costs, hydrology, fuel prices, and transmission capabilities. Countries like Serbia, Bosnia and Herzegovina, and Bulgaria, which rely heavily on coal, often exported competitively priced electricity to neighboring markets. In contrast, Albania and Montenegro capitalized on their hydropower resources to export surplus energy during peak hydrological periods.
As the region approaches 2026, carbon intensity is emerging as a critical factor alongside traditional generation costs. The introduction of CBAM is reshaping which countries can export competitively into EU markets, influencing utility investment decisions in renewable energy and prompting industrial consumers to seek low-carbon electricity contracts. This transition is indicative of a broader restructuring within the regional electricity market where factors such as carbon exposure and renewable integration are becoming essential for long-term competitiveness.
Recent data highlights a stark shift in market dynamics. In the first quarter of 2026, cross-border electricity exchanges between the European Union and the Western Balkans saw a significant contraction, with total scheduled flows declining by approximately 25% year-on-year. Notably, electricity exports from EU markets to the Western Balkans plummeted by over 40%, while flows in the opposite direction also decreased. This trend is surprising given that wholesale electricity prices in parts of the Western Balkans remained lower than those in neighboring EU markets.
The underlying reason for this shift lies in the new market incentives created by CBAM. Under this mechanism, imported electricity generated from high-carbon sources incurs increasing carbon cost adjustments upon entering EU markets. Consequently, coal-based electricity from the Western Balkans is becoming less competitive compared to low-carbon alternatives available within the EU.
This situation poses significant challenges for countries like Serbia, which has long been a major electricity producer in the region through its lignite-fired power plants operated by EPS at facilities such as Nikola Tesla and Kostolac. While these plants have historically provided low-cost baseload electricity and supported exports during favorable conditions, their reliance on lignite increasingly complicates Serbia’s ability to compete under a carbon-sensitive framework.
Despite efforts to ramp up renewable energy projects like wind and solar, Serbia’s overall carbon intensity remains heavily influenced by lignite generation. As a result, electricity exported to EU markets carries an increasing amount of embedded carbon exposure, particularly during periods when thermal generation compensates for renewable shortfalls.
Similar pressures are evident in Bosnia and Herzegovina, where a mix of hydropower and lignite generation has allowed for competitive exports in the past. However, tightening European carbon regulations are making coal-backed exports less appealing despite their relatively low production costs.
The implications extend beyond utilities; industrial sectors across South-East Europe are recognizing that their electricity sourcing impacts broader competitiveness in EU markets. Manufacturers in steel, chemicals, automotive components, and other industries are increasingly attentive to the carbon intensity of their electricity supply due to its influence on relationships with European buyers and financiers. This has resulted in a growing demand for renewable-backed industrial electricity contracts.
Albania stands out as a notable beneficiary of these changes due to its heavy reliance on hydropower, which provides one of Europe’s lowest-carbon generation mixes. Favorable hydrological conditions have bolstered hydroelectric output during early 2026, enhancing Albania’s export positioning at a time when carbon sensitivity is paramount.
Montenegro presents a more complex scenario with its combination of hydropower assets and emerging wind generation. The country operates within a regional electricity environment still largely dominated by thermal systems but could enhance its position as a low-carbon balancing exporter through future renewable expansion and improved transmission connections.
Romania offers a distinct model with its diversified energy portfolio that includes nuclear baseload generation alongside hydropower and growing renewables. This low-carbon structure positions Romania favorably within South-East Europe’s evolving electricity market landscape as CBAM pressures mount.
The ongoing transition is creating new hierarchies in investment strategies across the region. Renewable projects are now seen not only as assets but also as crucial components for reducing overall system carbon exposure. For instance, wind farms in Serbia are increasingly viewed as mechanisms for lowering national carbon intensity rather than just additional energy sources.
However, merely expanding renewables does not address all challenges; intermittent generation necessitates robust balancing support. Coal-heavy systems that rely on ramping up thermal plants during low renewable output periods continue facing elevated carbon exposure. Thus, developing flexibility infrastructure—such as battery storage and enhanced transmission interconnections—becomes vital for achieving lower overall system carbon intensity.
The Trans-Balkan Corridor and other regional interconnection upgrades facilitate more efficient movement of low-carbon electricity across borders. Hydropower from Albania or Montenegro can stabilize renewable-heavy systems elsewhere while Romanian nuclear output may provide balancing support during periods of low wind generation.
This trend toward deeper regional integration is crucial as isolated coal-heavy systems become less competitive over time under CBAM’s influence. The geopolitical implications are significant; Europe’s energy transition increasingly intersects with industrial policy considerations and strategic autonomy regarding carbon compliance with EU climate objectives.
For countries within the Western Balkans capable of accelerating renewable deployment and grid modernization, opportunities for stronger integration with EU markets abound. Conversely, those reliant on lignite risk marginalization amid intensifying carbon pricing pressures.
This evolving landscape will undoubtedly reshape regional investment flows as international investors prioritize long-term carbon competitiveness when evaluating South-East European energy markets. Renewable-heavy systems with strong balancing capabilities will attract greater institutional interest compared to those dependent on thermal generation amidst regulatory uncertainties.
Corporate Power Purchase Agreements (PPAs) further reinforce this trend as industrial consumers across Serbia, Romania, and Greece seek renewable-backed contracts not only for price stability but also for environmental compliance and sustainability initiatives linked to European supply chains.
The structural changes initiated by CBAM are fundamentally redefining commercial relationships within the regional energy market. Utilities that can provide low-carbon electricity gain strategic advantages beyond mere wholesale trading dynamics while renewable projects benefit from increased industrial demand.
At the same time, legacy thermal assets face mounting pressure as coal continues to play a critical role in ensuring system stability during periods of low renewable output or hydrological stress. However, long-term viability for coal generation diminishes under expanding carbon pricing frameworks.
This scenario presents governments across the region with complex transition challenges: rapid coal phase-outs could destabilize systems if renewable infrastructure fails to develop swiftly enough; yet delaying transitions increases exposure to market penalties associated with carbon emissions.
The path forward lies increasingly in integrated infrastructure development encompassing large-scale storage deployment alongside advanced balancing markets capable of stabilizing renewable-heavy systems effectively.
Countries that progress rapidly towards these goals will likely enhance their long-term positions within regional markets despite existing regulatory fragmentation and inconsistent carbon pricing structures across the Balkans.
Ultimately, CBAM emerges not merely as an environmental policy tool but as a transformative force reshaping South-East Europe’s electricity economy where carbon intensity will dictate trading competitiveness and infrastructure value moving forward.
