Montenegro approves €40 million EPCG borrowing to strengthen power resilience as trade deficit widens

Montenegro’s decision to approve €40 million in borrowing for its state utility EPCG highlights a shift in how energy spending is being justified: not only by generation targets, but by the need to stabilise domestic supply while external accounts come under pressure.

The financing, arranged with Germany’s development bank KfW, will support the long-planned expansion of the Perućica hydropower plant. The project includes installing a new generating unit that is expected to lift total capacity toward 365 MW. While the investment is modest in absolute terms, it arrives as Montenegro’s economic model—reliant on imports, tourism revenues and volatile electricity export earnings—faces increasing strain.

External imbalance and weaker export cushioning

Recent trade data points to widening pressure. Montenegro’s total goods trade has exceeded €5 billion, but exports remain weak at around €570 million. Imports have risen to approximately €4.46 billion, leaving a deficit above €3.5 billion. Electricity had previously provided some offset through opportunistic exports, but it is no longer delivering the same cushion.

CBAM and carbon costs reshape electricity export economics

The deterioration is being accelerated by the EU’s Carbon Border Adjustment Mechanism (CBAM). EPCG has already recorded a €13 million loss in the first quarter of 2026 as carbon pricing begins to erode the competitiveness of electricity exports into EU markets. Even when generation is strong, realised prices are increasingly discounted to reflect future carbon costs.

Perućica expansion framed as supply stability rather than export growth

Against this backdrop, expanding Perućica takes on a different emphasis. The project is described less as a bid to increase export capacity than as an effort to reinforce domestic supply stability. Hydropower remains Montenegro’s primary low-carbon resource, and additional capacity is intended to provide flexibility and reduce exposure to import dependence during periods of weak generation or outages at thermal plants.

Deal structure also targets EPCG’s balance sheet

The borrowing package is paired with additional financial support. Alongside the €40 million investment loan, the government has endorsed a separate €30 million refinancing arrangement that allows EPCG to restructure short-term liabilities accumulated during 2025. Those liabilities were driven largely by electricity imports needed during outages at the Pljevlja coal plant and unfavourable hydrological conditions.

Together, the two facilities point to a combined strategy of capacity expansion and balance sheet stabilisation. The concessional terms of the KfW loan—spanning more than a decade with a multi-year grace period—reflect alignment with European development priorities, particularly decarbonisation and energy system resilience.

Why it matters for investors: energy policy and capital allocation are converging

For investors and lenders, Montenegro’s energy sector sits at the intersection of several structural pressures: carbon pricing effects on exports, hydrological volatility affecting generation reliability, and growing import dependence that feeds directly into the trade deficit. Expanding hydropower capacity offers one of the few levers available that can address multiple constraints at once.

The timing also matters. The new unit is expected to come online around 2027, coinciding with when CBAM-related costs are expected to be fully reflected in electricity trade flows. By then, reducing import exposure while maintaining stable domestic supply could carry greater financial weight than marginal gains from export optionality.

Montenegro’s approval of EPCG’s borrowing therefore signals more than routine infrastructure investment: it reflects an emerging reality in which energy policy, external balances and capital allocation are increasingly intertwined. How effectively Montenegro secures and optimises its domestic energy base will increasingly shape its ability to manage its trade deficit, navigate carbon pricing pressures and sustain growth.