The South-Eastern European (SEE) power market is undergoing a significant transformation, characterized by a marked decline in the role of coal as a marginal price-setting technology. As observed during the trading session on 26 February 2026, coal’s contribution to generation was approximately 18 percent, yet this share had little impact on price formation. Instead, the market dynamics shifted towards two primary regimes: renewable energy sources suppressing prices during daylight hours and gas-driven scarcity pricing during evening demand peaks. This emerging binary structure is shaping the future of electricity pricing in the region.
Historically, coal served as a stabilizing buffer within the generation mix, stepping in to set prices during periods of high demand or low hydroelectric output. However, various factors have eroded this role, including rising carbon costs, aging infrastructure, and increased competition from low-cost renewable energy sources. Consequently, coal has been relegated to a non-marginal position under typical operating conditions.
The February trading session highlighted that even at times of increased demand, coal units were often priced out by renewables and gas imports due to their higher variable costs. With elevated EU Emission Trading Scheme (EUA) prices expected to persist, coal’s cost structure frequently surpasses that of gas on a clean spark basis, limiting its ability to influence clearing prices except under extreme conditions such as severe cold snaps or extended periods of low renewable generation.
This shift towards binary price formation simplifies the marginality tree but simultaneously heightens volatility in the market. The absence of coal as an intermediate layer means that price transitions are now abrupt rather than gradual, leading to significant fluctuations based on renewable output levels. For instance, high solar generation can push prices down sharply, while low availability can lead to rapid price increases driven by gas-fired units.
In southern SEE markets like Serbia, North Macedonia, and Montenegro, this phenomenon is particularly pronounced. During midday hours when solar output is high, coal units are often entirely displaced from the market, resulting in prices near zero. As daylight fades and solar generation decreases, gas units quickly set the marginal price, leading to swift price escalations without any stabilizing influence from coal.
Hungary presents a slightly different scenario where coal still plays a role but is not central to price formation. The Hungarian market is increasingly influenced by imports from neighboring countries and domestic renewables, with coal rarely determining clearing prices. This results in notable intraday price volatility akin to that seen in southern markets.
The increasing carbon pricing regime acts as a critical driver behind these changes. As EUA costs become more embedded in coal generation economics, even small increases in carbon prices disproportionately affect coal’s competitiveness against gas and renewables. The 26 February trading session occurred amidst rising EUA forward prices, further entrenching coal’s structural disadvantage.
The implications for market volatility are substantial. In systems with multiple marginal layers, price adjustments tend to be incremental; however, in a binary framework where coal has lost its buffering capacity, minor shifts in renewable output or demand can result in dramatic price movements. For example, a sudden reduction in solar output can transition the system from surplus to scarcity almost instantaneously.
This evolving landscape necessitates a reevaluation of asset valuation and trading strategies within the sector. Coal plants are experiencing diminishing revenue opportunities as they find themselves squeezed between the dominance of renewables and gas-driven peaks. Even operational hours for coal are increasingly limited as they often run below marginal pricing levels.
For traders and market participants, adapting to this binary pricing environment means shifting focus away from traditional fuel spread strategies involving coal. Instead, emphasis must be placed on accurately forecasting renewable output and managing exposure to gas prices during peak demand periods. The market now poses a critical question each hour: Are renewables sufficient for supply or will gas be needed?
This binary structure also amplifies the significance of forecasting accuracy. In an environment where supply balances precariously between surplus and scarcity, small errors can lead to significant price impacts—overestimating solar output could trigger unexpected scarcity while underestimating it may prolong periods of low pricing.
Furthermore, the decline of coal’s marginality has implications for cross-border electricity flows. In previous coal-buffered systems, local plants could mitigate shocks without immediate repercussions for neighboring markets; however, under the current binary regime, disruptions propagate rapidly across borders. A decline in renewable output in one area can lead to increased imports from adjacent markets while surges can flood others with surplus energy if interconnections permit.
Policy frameworks continue to reinforce this trajectory as environmental regulations and decarbonization targets discourage investments aimed at extending the life of existing coal facilities. Even where operational capacity remains intact, its strategic relevance is diminishing within market pricing structures that increasingly reflect a post-coal reality.
Looking forward, it appears that binary price formation will intensify rather than diminish as renewable capacity—particularly solar—continues to expand throughout southern SEE markets. With gas remaining the primary flexible thermal resource and carbon pricing trends unlikely to reverse course, the electricity system is poised to oscillate between phases of renewable surplus and gas-driven scarcity with little room for moderation.
The developments observed during the 26 February 2026 trading session underscore a pivotal moment for coal’s role within SEE power markets. While still present in generation mixes, coal no longer exerts influence over pricing mechanisms—a clear indication that the market has transitioned into a new phase characterized by binary dynamics and heightened volatility.
