Recent trading activities in April have highlighted a significant transformation in cross-border electricity flows across Southeast Europe (SEE), indicating a trend towards fragmentation within the regional market. The long-standing practice of price arbitrage, which traditionally facilitated the movement of lower-cost electricity from the Western Balkans to higher-priced markets in the EU, has shown signs of weakening. This shift is underscored by a notable reduction in export volumes and changing directional balances, suggesting an evolving landscape for energy trade.
Historically, the price differentials between Western Balkan markets and EU countries such as Italy, Austria, and Hungary have driven substantial cross-border exchanges. However, in April 2023, despite persistent price spreads averaging around €25–30/MWh, export flows did not keep pace with expectations. A clear indicator of this trend was the decrease in exports to Italy, where average flows dropped by approximately −333 MW, reflecting diminished arbitrage efficiency.
Contributing to this shift are newly implemented carbon-related adjustments on cross-border electricity trade. The introduction of carbon cost mechanisms has altered export economics by imposing additional charges on electricity entering EU markets based on standardized emission assumptions rather than actual generation profiles. This regulatory change has disproportionately affected electricity generated from low-cost yet carbon-intensive sources in the Western Balkans, limiting their access to EU markets despite favorable price conditions.
The implications of these changes are significant; overall cross-border trading activity has declined by approximately −25% compared to previous periods. This downturn is particularly critical for export-dependent economies such as Montenegro and Bosnia and Herzegovina, where cross-border sales are vital for revenue generation.
In contrast to decreasing exports toward EU markets, there has been a modest uptick in exports to Ukraine and Moldova, indicating a shift towards eastern demand centers rather than traditional destinations within the EU. Meanwhile, internal exchanges among Balkan countries—such as Serbia, Bosnia, North Macedonia, and Albania—remain active due to geographical proximity and compatible regulatory frameworks. However, these internal flows are smaller and less capable of managing surplus generation during peak output periods.
This fragmentation poses several risks from a systemic perspective. Reduced integration with EU markets limits the ability of SEE countries to export excess renewable energy, increasing the likelihood of curtailment during times of high generation. Additionally, it hampers access to cost-effective imports during tight supply situations, potentially leading to increased price volatility across the region.
The future trajectory of cross-border electricity flows will largely depend on regulatory alignment efforts. Without mechanisms that accurately reflect carbon intensity and facilitate deeper integration into EU frameworks, Southeast Europe risks evolving into a semi-isolated trading zone characterized by lower liquidity and heightened price fluctuations.
