South East Europe’s power market is frequently discussed in terms of coal, gas and solar, but water conditions remain a key driver in parts of the region. In the Western Balkans, hydropower plays a central role in balancing electricity supply and demand. Albania is the clearest case, with its electricity system overwhelmingly based on hydro. Bosnia and Herzegovina, Montenegro, Serbia and North Macedonia also rely on hydropower to varying degrees.
Research by Bruegel highlights that Western Balkan electricity generation is significantly reliant on hydropower. It notes that Albania produces close to all of its electricity from hydro. This dependence links regional generation outcomes to seasonal and weather-related variables. It also affects how quickly systems can adjust to changing demand and supply conditions.
Hydropower’s role in flexibility and regional pricing
Hydropower can provide low-carbon electricity, along with flexibility, storage and fast ramping capabilities. In wet years, hydro-heavy systems can export electricity and reduce prices across the region. In dry years, the same systems may shift toward import dependence and contribute to price stress. These swings are tied to hydrological conditions rather than fuel availability alone.
Hydrology is therefore a major market risk for South East Europe. The 2025 drought conditions provided an example of how quickly output can change. AP reported that a severe drought and heatwave affected the Western Balkans, reducing hydropower output in Albania. The report said the government spent around €60 million on energy imports.
The limits of reservoir flexibility during drought
Hydro can shift energy across hours, days or seasons, but it depends on controllable storage only within available water inflows. Reservoirs can move generation when there is water to store, but prolonged drought reduces both energy availability and flexibility value. This creates a mismatch between operational flexibility and the physical constraints of inflows. During extended dry periods, the ability to respond to market needs declines.
Climate volatility increases the exposure of power systems to these dynamics. Hot, dry summers can raise electricity demand through air conditioning while reducing hydro availability at the same time. The combination affects both demand levels and generation capacity. Solar output may increase during heatwaves, but it does not cover evening demand unless paired with storage or demand shifting.
Cross-border trade effects from changing hydro output
Hydropower variability also influences cross-border electricity flows in a connected regional system. Albania can act as an exporter in wet periods and an importer in dry periods. Montenegro and Bosnia and Herzegovina can also swing depending on hydrological conditions. These changes affect neighboring markets through altered import needs.
A dry Balkan hydro season can increase imports from EU markets, raise prices and intensify competition for cross-border capacity. For market participants trading across borders, these shifts translate into changes in balance expectations and congestion outcomes. Rainfall patterns, snowpack conditions and reservoir levels become operationally relevant alongside fuel prices . River flows and seasonal temperature outlooks are also cited as important inputs for forecasting.
Forecasting needs for traders and planning for renewables
For traders, hydro forecasting is described as essential because multiple hydrological indicators can drive major balance swings . Rainfall, snowpack, reservoir levels and river flows are highlighted as factors that can be as important as fuel prices in some circumstances. Seasonal temperature outlooks also play a role in anticipating demand and generation conditions. A market model that ignores hydrology is described as likely to miss these shifts.
For renewable developers, hydropower is presented as a potential complement to solar generation. Solar produces during daytime hours, which can allow hydro reservoirs to conserve water for evening or peak periods. In theory, hydro can function as a natural battery for solar-heavy systems. However, this depends on reservoir management practices, market rules and water availability.
Diversification options for policymakers and modernization for investors
For policymakers, hydropower risk supports diversification efforts even where systems are low-carbon due to hydro dominance . A hydro-heavy system may not be automatically secure when weather conditions deteriorate. Albania’s experience is cited as showing how dependence on one weather-sensitive source can create import risk. Solar, wind, storage, interconnectors and demand response are listed as measures that can reduce exposure.
For investors, hydro modernization is described as an opportunity that may be overlooked . Existing hydropower assets can often be upgraded with better turbines, digital controls and improved reservoir management. Environmental safeguards are also referenced as part of modernization work. Pumped hydro is mentioned as another option where geography and permitting allow.
Environmental considerations in new hydropower projects
Hydro development needs careful handling because new projects can raise environmental concerns along with biodiversity and social issues . The text highlights that these impacts are especially relevant on sensitive river systems. The region is described as needing improved hydro flexibility without creating ecological costs. This framing links operational goals with constraints related to permitting and environmental protection.
South East Europe’s power market is characterized as not only a fuel market but also a weather market . Sun, heat, rainfall, snow and wind are described as increasingly determining prices across the region. Hydro remains one of the region’s strategic assets while being treated as flexible supply subject to weather risk rather than guaranteed firm generation.
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