Serbia’s electricity market shifts under CBAM: exports shrink, liquidity moves and prices localise

CBAM’s move into its definitive phase is reshaping Serbia’s electricity market in ways that go beyond trade flows. In the first quarter of 2026, the country’s position within Southeast Europe’s power system is undergoing a structural transition—from an export-capable, coal-anchored model integrated with EU markets through arbitrage—to a more constrained, domestically anchored market where carbon-adjusted economics increasingly determine what can be monetised.

Price spreads persist, but arbitrage breaks

Serbia’s pricing in Q1 2026 showed the shift with unusual clarity. Average day-ahead prices averaged €94.7/MWh, while neighbouring EU benchmarks were clustered between €120–130/MWh. In a pre-CBAM setting, a spread of more than €30/MWh would typically have supported strong export flows to Hungary, Croatia and Romania. Instead, the spread persisted throughout the quarter, signalling that the arbitrage mechanism underpinning Serbia’s cross-border trading model had weakened or failed.

Carbon adjustments compress export margins

The core driver is the embedded carbon cost under CBAM. Using Serbia’s default emission factor of 1.041 tCO₂/MWh, the import adjustment cost is estimated at about €78.45/MWh. That effectively turns Serbia’s export price into a carbon-adjusted cost approaching or exceeding EU market prices. As a result, export margins are compressed to near zero or negative levels even when headline price differences appear favourable—making Serbian electricity commercially uncompetitive in EU markets despite being cheaper at generation.

Exports don’t expand; transit value weakens

The impact shows up in Serbia’s trade position. While the Western Balkans moved into net export territory in Q1 2026, the change was attributed primarily to reduced imports rather than a meaningful increase in exports. Serbia’s traditional export corridors—especially toward Hungary—saw diminished commercial activity. Even where interconnection capacity remained available and highly allocated, weaker economic incentives reduced utilisation.

This decoupling between physical availability and commercial use points to a structural change in how Serbia participates in regional trade: electricity may still move through the grid as part of broader flows, but the associated trading value is less likely to be captured by Serbian market participants.

SEEPEX liquidity declines as strategies lose appeal

The shift is also visible on SEEPEX, described as the largest exchange in the Western Balkans and historically both a domestic trading platform and a regional transit hub. In Q1 2026, traded volumes declined by approximately 11%. The contraction diverged from growth seen in hydro-dominated markets such as Albania and Montenegro.

The reported decline reflects erosion of transit-based trading strategies that relied on Serbia’s geographic position and price competitiveness. With CBAM reducing the attractiveness of those strategies for EU-linked activity, liquidity has shifted toward markets with lower carbon exposure.

Price formation becomes more local as integration weakens

Reduced trading activity and weaker integration are expected to alter how prices form. In a more liquid and integrated market, Serbia’s prices would be influenced by regional dynamics and cross-border arbitrage; with less activity, price formation becomes increasingly localised around domestic supply conditions rather than regional equilibrium.

In Q1 2026 this localisation was reinforced by strong hydro output across the region. Hydro-driven price pressure lowered Western Balkan prices without translating into increased exports from Serbia.

Coal dependence keeps CBAM exposure high

Serbia’s generation mix remains central to its CBAM exposure. Coal continues to dominate electricity supply: output in Q1 2026 was 5.47 TWh, down from 6.08 TWh in the same period of 2025. The reduction reflects both lower demand for thermal generation due to strong hydro availability and displacement of coal in the merit order.

Even so, structural reliance on coal maintains a carbon profile that makes external sales harder under CBAM economics—creating tension between domestic competitiveness and constrained export monetisation.

A new trading geography: intra-regional focus replaces EU exports

The traditional model—exporting baseload coal generation into EU markets during periods of price divergence—is described as no longer viable under current CBAM conditions. Trading activity increasingly concentrates on intra-regional exchanges within the Western Balkans where carbon costs do not apply in the same way. This inward shift reduces Serbia’s exposure to EU markets and changes where commercial value is captured.

At the same time, physical electricity flows continue through Serbia as part of the south–north corridor linking Greece, the Western Balkans and Central Europe. But because commercial schedules diverge from physical flows, Serbia’s role as a transit country is not fully reflected in trading activity—and therefore delivers less economic benefit from its strategic position.

Operational complexity rises when schedules don’t match flows

The divergence between physical flows and scheduled trades introduces operational challenges for Serbia’s transmission system operator environment described in the source analysis. Unscheduled or loop flows driven by network conditions rather than commercial intent can increase system management complexity. Transmission operators must balance flows that do not align with scheduled trades, raising balancing costs and congestion risk; over time this could contribute to higher network tariffs and system costs.

Carbon-market volatility adds financial risk

The interaction between CBAM and EU ETS further complicates expectations for traders and utilities. Carbon prices averaged €75.36/tCO₂ in Q1 2026 and showed volatility during the quarter. That links exporting electricity costs to developments in carbon markets—adding financial risk on top of electricity price fluctuations.

The source characterises this as a move toward more financially driven trading conditions that require improved risk management capabilities and hedging approaches.

Investment signals are mixed: decarbonisation pressure vs smaller market scale

From an investment perspective, signals are described as mixed but pointedly challenging for coal-based assets while highlighting constraints for new build renewables. The structural disadvantage facing coal-based generation suggests accelerated decarbonisation—including investment in wind and solar to reduce carbon exposure and improve cross-border competitiveness.

However, reduced cross-border flows can undermine market scale and integration needed to support such investments. The analysis notes that renewable project economics depend not only on generation costs but also on access to markets and long-term contracts; if cross-border trade remains constrained, effective market size may shrink enough to affect bankability.

The need for grid infrastructure and flexibility also grows: integrating variable renewable output requires transmission capacity upgrades plus balancing mechanisms and coordination with neighbouring systems—issues highlighted by Q1 2026 divergence between commercial schedules and physical flows.

A repositioning toward flexibility rather than transit arbitrage

The report concludes that Serbia’s strategic position remains an asset but its value is evolving. Rather than functioning primarily as an arbitrage-driven transit hub within regional trade patterns shaped by price divergences, Serbia may increasingly operate as a provider of balancing services within a more segmented regional system—requiring changes to market design, operational practices and investments such as battery storage and demand-side management.

Looking ahead, outcomes will depend on several interacting factors: how CBAM develops (including potential refinements affecting emission factors), whether carbon pricing mechanisms emerge within Serbia that narrow incentives relative to EU markets, how quickly renewables scale up alongside grid modernisation efforts—and whether these steps preserve stability while supporting decarbonisation goals amid shifting regional integration dynamics.