As Southeast Europe approaches 2026, hydropower is poised to play a crucial role in shaping the region’s energy landscape. This renewable resource not only serves as a primary energy source but also acts as seasonal storage and a flexible balancing mechanism, making it the most cost-effective option for meeting fluctuating demand. The variability of hydropower output, influenced by annual precipitation levels, can lead to significant economic consequences for countries like Serbia, which is strategically positioned at the nexus of regional electricity trading.
Serbia’s hydropower infrastructure is anchored by the Electric Power Industry of Serbia (EPS), which operates 16 hydropower plants with a total capacity of approximately 3,015 MW. In 2024, hydropower contributed about 32.2% to EPS’s electricity generation, averaging around 10.6 TWh annually over the past decade. However, projections for 2025 indicate a potential decline in hydro generation due to drought conditions, with expectations dropping to around 8 TWh. This anticipated reduction highlights the sensitivity of Serbia’s energy sector to hydrological changes and sets the stage for assessing potential outcomes in 2026.
Forecasting hydropower performance in 2026 requires an understanding of two critical factors: reservoir levels at winter’s end and the prevailing regional price environment influenced by carbon emissions and gas prices. As of January 2026, EU carbon permits are expected to trade between €90 and €92 per tonne, establishing a higher marginal cost for thermal generation across interconnected markets. This price dynamic is essential as it impacts day-ahead prices in Southeast Europe, particularly during periods of tight supply when thermal generation becomes more expensive.
The beginning of 2026 may see favorable reservoir conditions across Europe, reducing the likelihood of severe shortages early in the year. For Serbia, strong reservoir levels exiting winter could facilitate effective water management throughout spring and summer, minimizing reliance on imports and enhancing system flexibility during peak demand hours.
In a base-case scenario for 2026, assuming a return to normal hydrological conditions following the drought year of 2025, Serbia’s hydro output could stabilize between 9.5 and 11.0 TWh. This level of production would likely compress peak price spreads and decrease reliance on imports while improving the availability of ancillary services that hydro can provide more efficiently than thermal units.
An optimistic scenario could see Serbia achieving hydro generation between 11.5 and 13.0 TWh if rainfall is abundant early in the year. Such an outcome would allow Serbia to reduce thermal dispatch and imports while enhancing export opportunities during peak demand periods, thereby generating additional revenue despite potentially lower domestic prices.
Conversely, should dry conditions persist into summer, hydro output may drop to between 7.5 and 9.0 TWh, mirroring or slightly improving upon the previous year’s drought profile. This situation poses macroeconomic risks as increased thermal generation and imports would drive up day-ahead prices while straining balancing costs due to reduced hydro availability during critical periods.
The relationship between hydrology and import requirements is nonlinear; significant shortfalls can lead to steep increases in import needs during peak months. A deficit of just 2-3 TWh relative to normal production could impose an external cash burden ranging from €220 million to €450 million depending on market conditions—factors that could exacerbate Serbia’s current account deficit and fiscal pressures if retail tariffs are adjusted to mitigate these costs.
Market dynamics in 2026 will be further complicated by elevated CO₂ prices, which will push up thermal generation costs and create a more convex pricing curve during tight supply hours. Hydro resources will become increasingly valuable not merely for their volume but for their ability to provide flexibility during high-demand periods when volatility spikes.
As balancing markets evolve across Southeast Europe, the ability of hydro plants to deliver ramping capacity without the fuel cost fluctuations faced by thermal plants will become increasingly important. In years with adequate water supply, Serbia can enhance its provision of secondary reserves domestically while reducing reliance on costly balancing imports from neighboring countries.
Comparatively, Albania’s reliance on hydropower creates even greater volatility in its energy market due to its dependence on rainfall patterns. In contrast, Romania’s diversified generation portfolio often stabilizes regional dynamics, while Bulgaria’s mix interacts variably with its nuclear and thermal capacity. Serbia’s position enables it to influence not only its domestic market but also cross-border electricity flows into neighboring countries based on its own hydrological outcomes.
Looking ahead to trading behavior in 2026, a stable hydro year (9.5-11.0 TWh) would likely see Serbia act as a neutral-to-modest exporter during shoulder seasons while becoming a modest importer during peak winter evenings. In contrast, an exceptionally wet year (11.5-13.0 TWh) would enhance export capabilities and flatten price curves across seasons; conversely, a dry year (7.5-9.0 TWh) would increase import dependency and price volatility significantly.
For stakeholders monitoring Serbia’s energy landscape into early 2026, two key indicators will be critical: the trajectory of reservoir levels following winter and the ongoing trends in CO₂ pricing within regional markets. Strong reservoir levels would suggest reduced import risk and potentially lower summer scarcity spreads; weak levels would heighten concerns over supply constraints and escalate market pricing pressures.
Ultimately, Serbia’s hydropower landscape in 2026 represents more than just a story about renewable energy share; it encapsulates broader macroeconomic stabilization challenges that will require careful monitoring by investors and policymakers alike as they navigate an increasingly complex energy environment.
