The implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) is beginning to significantly impact the power sectors in the Western Balkans, revealing stark differences in how national systems are positioned to absorb these changes. Montenegro’s Elektroprivreda Crne Gore has reported a loss of €13 million in the first quarter of 2026, while Serbia’s Elektroprivreda Srbije is facing a more intricate situation characterized by delayed but potentially larger financial repercussions due to its generation model and industrial connections.
This disparity arises not from policy timing but from the inherent architecture of each country’s power system. Montenegro’s smaller, export-oriented electricity grid has already translated CBAM into immediate financial setbacks. In contrast, Serbia’s electricity sector is predominantly domestic, with exports making up roughly 10% of total production. This has provided a temporary shield for Elektroprivreda Srbije (EPS) against initial CBAM-related cash outflows, although it also obscures deeper vulnerabilities that are starting to emerge.
Central to Serbia’s exposure is its reliance on lignite-fired generation. EPS operates over 4.3 GW of lignite capacity, making it one of Europe’s most carbon-intensive electricity producers. The implications of this high carbon intensity under CBAM mechanics could lead to an estimated additional cost of €50–60 per megawatt-hour (MWh) for Serbian electricity exported to EU markets. This cost could erode the competitiveness of Serbian electricity, which has seen wholesale prices averaging between €90 and €110 per MWh over the past year, potentially excluding it from EU merit order during many trading periods.
The consequences extend beyond mere profitability challenges; they signal a gradual erosion of market access. While Montenegro is experiencing realized financial impacts, Serbia is amassing what can be termed latent losses—costs not yet evident in financial statements but embedded within future trading constraints and pricing structures. Projections indicate that Serbia’s exposure related to CBAM could reach around €200 million annually, with broader economic ramifications exceeding €250 million when indirect effects are factored in.
Understanding these indirect effects is crucial as CBAM encompasses not only cross-border electricity flows but also the carbon intensity associated with exported industrial goods. In Serbia, industries such as steel and chemicals are closely linked to electricity consumption, thus making EPS’s emissions profile a critical factor influencing overall pricing structures across various sectors.
The feedback loop created by carbon-intensive generation raises implicit electricity costs that manifest in the embedded emissions of industrial exports entering the EU market. This results in a layered competitiveness penalty that extends beyond EPS itself and reshapes profit margins throughout Serbia’s industrial landscape.
Montenegro’s recent experience provides insights into this dynamic. The reported €13 million loss reflects both direct and indirect effects of CBAM, including diminished export pricing and adjustments in trading strategies. Electricity has increasingly been redirected toward regional markets to avoid EU carbon exposure despite lower realized prices.
Serbia appears to be on a similar path but is transitioning more cautiously. EPS may consider reorienting its exports toward non-EU markets within the Western Balkans as a short-term strategy to circumvent CBAM impacts. However, this approach faces structural limitations due to smaller and less liquid regional markets that typically offer lower prices compared to EU benchmarks.
This gradual repositioning may transform EPS into a regional balancing utility with diminished exposure to price fluctuations in interconnected European markets. However, it also narrows potential revenue growth at a time when capital requirements are escalating significantly.
EPS has outlined substantial capital needs for renewable energy projects aimed at enhancing flexibility within its generation mix—these include approximately 1 GW of solar capacity and new wind developments alongside the long-awaited Bistrica pumped-storage hydropower project. These initiatives are essential not only for supporting a green transition but also for maintaining market access under CBAM regulations.
The economic rationale is clear: each additional megawatt of low-carbon generation reduces the average emissions intensity of Serbia’s energy system, thereby mitigating the effective burden imposed by CBAM costs. Conversely, delays in project deployment will exacerbate future expenses as carbon price differentials between Serbia and the EU remain significant—currently estimated at €50–60 per tonne of CO₂.
As such, there exists a narrowing window for strategic adjustments before full financial settlements under CBAM commence in 2027 for emissions tied to 2026 exports. This transitional phase allows EPS limited time to recalibrate its operational strategies before carbon costs become fully realized in cash terms.
This lag introduces uncertainty into current financial reporting as true carbon exposure costs have yet to be reflected in earnings statements. From an investment perspective, EPS presents a different risk profile compared to Montenegro’s EPCG; while EPCG’s exposure is already visible in quarterly results, EPS carries a forward-loaded risk profile that could significantly impact medium-term profitability and valuation metrics.
At the systemic level, these developments suggest profound shifts for Serbia’s role as a regional electricity exporter historically supported by low-cost lignite generation. The internalization of carbon externalities through CBAM effectively dismantles this advantage and compels a reevaluation of competitive dynamics across the sector.
The early loss recorded by Montenegro serves as an important benchmark for understanding this transition’s practical implications. For EPS, comparable figures have yet to manifest on balance sheets; however, underlying trends indicate that when they do appear, they will reflect broader realignments affecting both power generation and Serbia’s export economy at large.
