The electricity markets of Southeast Europe have experienced significant upheaval over the past decade, primarily driven by the disparities in generation costs between the coal-reliant Western Balkans and the more diversified energy systems of the European Union. Traditionally, this cost differential enabled traders to capitalize on price spreads by exporting power across borders, with significant activity observed in Serbia, Bosnia and Herzegovina, and Montenegro. However, this well-established trading model is facing serious challenges as regulatory frameworks evolve.
With the implementation of the Carbon Border Adjustment Mechanism (CBAM) set for early 2026, cross-border electricity trade is undergoing a fundamental transformation. The introduction of a carbon cost linked to emissions has introduced new economic pressures that threaten to dismantle the arbitrage strategies that have underpinned market interactions in the region.
In the first quarter of 2026, carbon prices averaged €75.36 per tonne of CO₂, resulting in effective import costs for electricity from coal-heavy systems ranging from approximately €70 to €86 per megawatt-hour (MWh). This additional financial burden has not only reduced profit margins but has also eliminated them in many instances, undermining traditional trading practices.
Market dynamics illustrate this shift starkly. Typically, a widening price spread between two markets would stimulate increased cross-border trading until equilibrium is restored. Contrary to expectations, Q1 2026 saw price differentials between Western Balkan markets and EU zones expand significantly—often exceeding €30/MWh and even reaching over €40/MWh in some cases—while cross-border flows actually declined. This anomaly signifies a critical disconnect between pricing signals and trading behavior.
The Montenegro–Italy corridor exemplifies this trend. Despite Southern Italy experiencing some of the highest day-ahead prices in the region at over €130/MWh compared to Montenegro’s €85/MWh, export flows did not increase as anticipated due to CBAM-related costs absorbing much of the price differential. Montenegro’s carbon cost was calculated at approximately €73–74/MWh, effectively neutralizing any perceived arbitrage opportunity.
This trend is not isolated; similar patterns are evident across other corridors such as Serbia–Hungary, where a spread of around €31/MWh failed to stimulate expected export flows. The underlying reason remains consistent: regulatory uncertainty surrounding compliance with CBAM has dampened the attractiveness of cross-border trades.
The repercussions extend beyond immediate trading activities into broader strategic considerations for market participants. The reliance on predictable spreads for arbitrage is now complicated by policy-driven cost adjustments that fluctuate with carbon pricing. Traders must now navigate a more intricate risk landscape that includes regulatory uncertainties alongside traditional market variables like fuel prices and demand patterns.
As a result of these complexities, market participants have exhibited more cautious trading behavior. Data from cross-border capacity auctions indicate a marked decrease in forward commitments prior to CBAM’s enforcement, with auction prices for interconnection capacity dropping by up to 67% on key routes. While allocation rates remain high—often surpassing 95%—the perceived value associated with this capacity has diminished significantly.
Regional power exchanges reflect this evolving landscape as well. Total traded volumes across the Western Balkans showed modest growth from 2.16 TWh to 2.39 TWh year-on-year; however, this aggregate figure obscures notable disparities at individual exchanges. Markets with strong domestic generation capabilities—especially those rich in hydro resources—have seen substantial increases in activity; for instance, Albania’s ALPEX reported volume doubling while Montenegro’s MEPX grew by nearly 49%. In stark contrast, Serbia’s SEEPEX saw an 11% decline in volumes, highlighting a shift away from arbitrage-driven liquidity towards domestic generation-focused activity.
The decline of transit trading poses further challenges for regional electricity flows that previously facilitated connections between EU markets through non-EU territories like Serbia and Bosnia and Herzegovina. The uncertainty surrounding CBAM’s treatment of transit flows has led traders to favor routes entirely within EU boundaries or those involving lower-emission systems, thereby reducing traffic through traditional corridors.
This rerouting could lead to inefficiencies within the overall system as electricity may traverse longer distances or less optimal paths merely to circumvent carbon charges associated with CBAM compliance. Over time, such shifts may necessitate reevaluations regarding interconnector utilization and infrastructure development across Southeast Europe.
The diminishing role of arbitrage also affects how interconnectors are perceived as financial assets within liberalized markets. As opportunities diminish due to rising carbon costs associated with CBAM compliance, market participants are less inclined to pay premium prices for capacity rights during auctions—a trend evidenced by declining forward auction prices noted at the end of 2025.
From an operational standpoint, restricted cross-border flows could hamper supply-demand balancing efforts historically supported by these transactions while increasing reliance on domestic generation sources that may not always be optimally efficient or cost-effective.
The interplay between CBAM and existing EU emissions trading systems adds another layer of complexity as traders must now factor in fluctuating carbon prices into their decision-making processes regarding electricity imports from non-EU countries—an integration that was previously less pronounced.
For coal-dependent markets within the Western Balkans, these developments present significant transitional challenges as they grapple with an immediate loss of competitive advantage due to heightened carbon costs reflective of their emission profiles. While investments into cleaner energy technologies are essential for future viability, they require time—a luxury these systems may not possess if excluded from cross-border trade opportunities.
Conversely, low-carbon systems such as Albania benefit from their zero-emission status under CBAM regulations but face inherent risks tied to variability in hydrological conditions affecting generation capacity year-to-year.
The trajectory for cross-border power trading within Southeast Europe hinges on how stakeholders adapt strategically amidst ongoing regulatory developments surrounding CBAM implementation. Potential refinements regarding transit flow treatments or adjustments in emission factors could reshape future trading dynamics while aligning regional carbon pricing mechanisms with EU standards might help restore some semblance of equilibrium necessary for efficient arbitrage practices.
Ultimately, it is clear that traditional models facilitating straightforward cross-border arbitrage are becoming obsolete as evolving regulatory frameworks and market fundamentals redefine operational landscapes across Southeast Europe’s energy sector.
