South-East Europe’s electricity markets have transitioned to formal liberalization and EU alignment, yet they exhibit persistent structural weaknesses that hinder competitive pricing. The limited size of these systems, ongoing dependence on imports, and thin trader participation contribute to economically distortive outcomes. As observed in recent years, particularly from 2024 to 2025, these issues have manifested prominently in cross-border capacity pricing, especially during daily auctions, resulting in significant value transfers from consumers and industrial users to a select group of market participants.
The situation surrounding Kosovo’s electricity imports has brought these challenges to the forefront. The Kosovo Transmission System and Market Operator highlighted irregularities in cross-border capacity auctions involving Elektroprivreda Srbije and Noa Energy Trade. This incident underscored a broader trend across South-East Europe where structural import needs intersect with the mechanics of daily auctions, revealing a consistent pattern rather than an isolated incident.
Countries like Kosovo, Montenegro, and North Macedonia frequently rely on imports due to their domestic generation’s inability to meet demand. In these instances, imports are not optional but essential for operational stability. This reality significantly influences price formation; when electricity imports are necessary regardless of cost, the pricing of cross-border capacity becomes a mechanism for extracting scarcity rents, even without explicit collusion or violations of rules.
The Kosovo case exemplified this dynamic throughout much of 2025. Daily cross-border capacity auctions into Kosovo were dominated by just two bidders, undermining the competitive nature of the auction process. Historical data from KOSTT indicated that transmission costs for imported electricity soared to €800 per megawatt-hour on certain days—an outcome driven not by generation scarcity but by structural conditions such as limited bidder participation and urgent demand.
Similar patterns have emerged in Montenegro’s intraday and balancing markets during 2022 and 2023, where prices often exceeded neighboring benchmarks amid hydrological stress or grid constraints. Montenegro’s small system size and lack of domestic flexibility meant that even minor interconnection limitations could skew the market towards a few dominant players. Consequently, prices cleared at levels disconnected from marginal production costs elsewhere while remaining compliant with market regulations.
Serbia and Romania experienced analogous phenomena in their balancing markets between 2023 and 2024. In both cases, balancing prices surged during stress events due to a limited number of units or traders setting the marginal price. Serbia’s reliance on coal and lignite units meant that balancing prices sometimes reflected constraint rents rather than true marginal costs. Romania faced similar issues when limited participation coincided with operational constraints.
Bulgaria provides another illustrative example; between 2021 and 2023, monitoring exercises revealed that long-term bilateral contracts and concentrated ownership suppressed liquidity in day-ahead and intraday markets. Although no formal auction abuses were identified, persistent volatility and price spreads exceeded what fundamentals would suggest. This case highlights how structural dominance can lead to economic effects akin to those seen in cross-border capacity pricing within smaller systems.
What connects these instances is not illegality but rather inherent structural vulnerabilities within South-East Europe’s electricity markets. Although formally liberalized, these markets remain functionally thin. The trading time horizon plays a critical role; while annual and monthly capacity auctions allow for risk absorption over time, daily auctions condense uncertainty into single clearing events. When imports are operationally necessary, demand for capacity becomes highly inelastic, compelling buyers to secure access immediately or face potential system imbalances.
This structural weakness is particularly pronounced in daily auctions, which represent the most fragile aspect of the market system. A border that may have numerous registered participants at the annual level often sees only a handful actively bidding during daily auctions. Consequently, clearing prices reflect the urgency of the marginal buyer rather than competitive dynamics.
Operational realities further exacerbate this issue. Transmission outages, maintenance schedules, security margins, and internal grid bottlenecks can suddenly reduce available capacity. When such constraints arise close to real-time operations, daily auctions react by pricing scarcity immediately—leaving little room for arbitrage or alternative sourcing options.
The financial implications of these dynamics can be substantial. For instance, if a structurally import-dependent border effectively prices up 150 megawatts of import capacity annually—corresponding to approximately 1.31 terawatt-hours—then even minor deviations from competitive pricing can lead to significant financial transfers. An excess congestion price of €5 per megawatt-hour applied across 0.8 terawatt-hours results in an annual transfer of about €4 million.
In more common medium-stress scenarios with excess pricing at €25 per megawatt-hour applied to 1.2 terawatt-hours, annual transfers could reach around €30 million on a single border. During extended stress periods with excess pricing at €80 per megawatt-hour on similar volumes, transfers could approach €96 million—figures that directly impact tariffs and supplier margins.
For industrial consumers facing wholesale electricity prices around €70 per megawatt-hour, an additional €6–10 per megawatt-hour tied to congestion risk translates into a significant increase in energy costs—ranging from 9% to 14%. Suppliers are compelled to adjust contract terms by shortening durations and increasing margins due to heightened risk perceptions linked to congestion.
The rising costs associated with balancing and profile adjustments compound these challenges further. Industrial operations with variable consumption profiles face increased exposure as cross-border flexibility diminishes; consequently, balancing prices can spike more readily under such conditions.
For energy-intensive sectors like cement or metal production—where processes consume substantial kilowatt-hours—the impact is direct: sustained increases in electricity prices can elevate production costs significantly. For large users consuming hundreds of gigawatt-hours annually, even modest price hikes can translate into millions in additional costs each year.
Reliability risks also exacerbate these economic pressures; when domestic flexibility is constrained and borders tighten, system operators may resort to emergency imports at any cost or implement demand response measures that can lead to curtailment events—each carrying hidden costs that influence long-term investment decisions.
Regulatory frameworks across South-East Europe have struggled to adapt adequately to these evolving market realities. High prices do not inherently indicate manipulation under current regulations; enforcement requires evidence of intent or rule-breaking rather than merely excessive outcomes. Consequently, many cases conclude without penalties despite significant economic harm being evident.
The primary challenge lies not in whether markets are liberalized but whether they possess sufficient depth and resilience. Without enhanced liquidity, broader participation options, alternative physical routes, and redesigned short-term capacity mechanisms, daily auctions will continue concentrating market power within small systems—leading price formation processes to reflect urgency instead of genuine competition.
In summary, cross-border electricity pricing distortions across South-East Europe are predictable outcomes stemming from market design interacting with inherent structural constraints. The recent developments observed in Kosovo, Montenegro, Serbia, Romania, and Bulgaria illustrate that legal compliance does not guarantee competitive outcomes; until the region addresses its short-term market fragility comprehensively, similar episodes will persist—altering electricity costs and impacting industrial competitiveness throughout South-East Europe.
