Is the Western Balkan Energy Market Moving Away from the European Union? 

The first quarter of 2026 could be remembered as the moment when the first visible consequences of the European Carbon Border Adjustment Mechanism (CBAM) began to emerge in the energy market of Southeast Europe. The latest quarterly report by the Energy Community Secretariat shows that the region’s electricity market is changing rapidly, while the former price links between the Western Balkan countries and the European Union have begun to weaken. 

Although CBAM was designed as an instrument to prevent carbon leakage and encourage decarbonization, the initial results indicate that its introduction is having much broader consequences – from changes in electricity trade to new challenges for integrating the Western Balkan energy markets with the European market. What is particularly interesting is that the changes are reflected not only in administrative procedures or additional costs for exporters, but also in the very dynamics of electricity price formation, trade flows, and the investment signals the market sends to energy companies. 

Hydrology Brings Record Hydropower Generation 

The beginning of 2026 was marked by exceptionally favorable hydrological conditions. Electricity generation from hydropower plants in the Western Balkan countries and neighboring EU Member States increased by up to 33 percent compared with the same period of the previous year. Total generation reached 22.18 TWh, which is 5.48 TWh more than in the first quarter of 2025. 

Serbia increased its hydropower generation by more than half a terawatt-hour, while Bosnia and Herzegovina, Montenegro, and North Macedonia also recorded significant growth. North Macedonia and Montenegro stood out in particular, more than doubling and increasing their hydropower generation by almost 80 percent, respectively. 

At the same time, Albania, whose electricity system largely depends on hydropower, increased its generation by up to 70 percent compared with the same period the previous year. 

These results once again confirm the extent to which weather conditions can influence the region’s electricity sector. Unlike large European markets, which have a more diversified generation mix, the Western Balkan countries remain relatively sensitive to hydrological conditions. In years with abundant precipitation, hydropower plants significantly reduce the need to rely on more expensive and more emission-intensive generation capacity, while during dry periods, electricity generation from thermal power plants increases or electricity imports rise. 

For this reason, the first quarter of 2026 provided a kind of natural experiment, showing how increased generation from renewable sources can affect the market. Greater availability of hydropower led to lower electricity prices in the region, but at the same time, it became clear that the mere existence of cheaper electricity is not sufficient to ensure its competitiveness on the European Union market. 

Coal Is Losing Its Primacy, but Remains Crucial for Serbia 

While hydropower plants recorded exceptional results, electricity generation from coal declined by 16 percent across the observed region. The largest decreases were recorded in Bulgaria, Romania, and Greece, while among the Energy Community Contracting Parties, Serbia registered the greatest reduction. 

Nevertheless, Serbia remained the largest producer of coal-fired electricity in the region, generating 5.47 TWh in the first quarter. This shows that the domestic electricity system still largely depends on thermal power plants, despite the growth in generation from renewable energy sources. 

The only exception in the region was Kosovo1, where coal-fired generation increased by eight per cent. 

In the long term, the decline in coal-fired generation represents a trend present across Europe. However, the pace of this transformation is not the same in all countries. While some EU Member States are rapidly closing thermal power plants and developing renewable energy sources, the Western Balkan countries still rely on existing lignite capacities as a key pillar of energy security. This applies particularly to Serbia and Bosnia and Herzegovina, where thermal power plants continue to account for the largest share of total electricity generation. 

In such circumstances, CBAM gains additional significance. The mechanism is not aimed solely at trade, but represents a strong economic signal that electricity generated with high carbon dioxide emissions will become increasingly less competitive on the European market. 

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Unexpected Decline in Electricity Prices in Serbia and the Region 

One of the most interesting findings of the report concerns movements in electricity prices on the day-ahead market. 

While prices in Hungary and Italy remained in the EUR 127-130 per megawatt-hour range, Serbia recorded an average price of only EUR 94.7 per megawatt-hour during the first quarter. Similar levels were recorded in Montenegro, North Macedonia, and Greece. 

This created a price difference of more than EUR 30 per megawatt-hour between certain European Union and Western Balkan markets. 

Such developments represent a significant shift compared to previous years, when prices in the region were generally aligned. During 2025, the difference between Serbia and Hungary mostly ranged between EUR 5 and 15 per megawatt-hour. By the beginning of 2026, this difference had increased sharply and remained at a historically high level throughout the quarter. 

For energy analysts, it is particularly interesting that such a large price gap was not the result of an energy shortage in the European Union, but rather a combination of regulatory changes and market expectations. Under normal circumstances, significantly lower prices in one market would encourage traders to export electricity to higher-priced markets, thereby gradually reducing price differences. However, during the first quarter of 2026, this mechanism did not function to the same extent as it had in previous years. 

The First Consequences of CBAM 

According to the Energy Community Secretariat, the implementation of CBAM is one of the key reasons for these market disruptions. 

As of 1 January 2026, the mechanism entered a new phase of implementation for electricity imported into the European Union. Although the Western Balkan countries are not formally subject to the same obligations as EU Member States, electricity trade between the region and the Union is now taking place under completely different economic circumstances. 

The essence of the problem is simple: even when electricity generated in Serbia, Montenegro, or Bosnia and Herzegovina is significantly cheaper than electricity on the European Union market, the additional costs associated with CBAM reduce or completely erase the economic benefit of exports. 

In other words, the price difference is no longer sufficient to encourage traders to use available cross-border capacities to the same extent as before. 

This is particularly important for countries that have traditionally generated significant revenues from electricity exports. If the trend continues, producers will have to seek new business models, invest in lower-emission generation, and adapt their strategies to the increasingly stringent climate rules coming from Brussels. 

Markets Are Moving Apart Instead of Becoming More Connected 

Perhaps the most significant conclusion of the report is that the process of market integration between the Western Balkans and the European Union is facing new challenges. 

The Energy Community Secretariat states that price correlations between Serbia, Montenegro, North Macedonia, and Hungary were very high during 2025. However, at the beginning of 2026, these links weakened significantly. At one point, the correlation between prices in Montenegro and Hungary fell almost to zero. 

This means that markets no longer respond to the same factors as before, and that price formation now follows a different logic than before the introduction of CBAM. 

At first glance, this may seem like a technical detail intended for market analysts, but the consequences could be highly significant. A high price correlation is one of the indicators of successful market integration. When it declines, the efficiency of cross-border trade decreases, investor uncertainty increases, and planning new energy projects becomes more difficult. 

Prepared by Milena Maglovski