Energy Prices and Subsidies in the Western Balkans

2. Context: Energy systems, prices, climate and reform commitments in the Western Balkans

Abstract

This chapter describes the Western Balkans’ energy landscape, highlighting the region’s fossil fuel dependence, pollution challenges, and emerging renewable opportunities. It highlights the tension between regulated electricity prices, dominant state-owned producers and necessary reforms. These reforms align with commitments to the UN, EU and Energy Community, including emissions reductions, fossil fuel subsidy elimination, carbon pricing implementation, and integration into competitive European electricity markets.

To set the context for the report, this chapter provides an overview of the region’s energy systems, pricing mechanisms, climate and reform commitments, and progress to date on reforms. As the Western Balkans works to balance energy security with climate commitments, the region continues to grapple with an energy mix that is largely based on fossil fuels and causes high levels of pollution and CO₂ emissions, while recent renewable energy auctions show promise for the expansion of renewables. Price regulation and cheap electricity remain important features of energy systems in the Western Balkans but need reform in the face of a heavy subsidy burden, and significant commitments for change. As the other side of the coin of price regulation and subsidies, state-owned enterprises dominate the energy sectors of the Western Balkans but have productivity challenges. Their role and governance must evolve. The reforms suggested in this report would support the region’s progress on its climate and energy sector reform commitments made to the UN, the EU and to each other in the Energy Community. These commitments include ambitious emissions reductions, the phasing out of fossil fuel subsidies, introduction of carbon pricing and emissions trading systems, and the integration into the European electricity market and creation of competitive retail markets.

The energy mix in the Western Balkans is largely based on fossil fuels and traditional biofuels; recent auctions show promise for expansion of renewables

Fossil fuels and traditional biomass dominate the energy mix in most Western Balkan economies. Combustion technologies (coal, oil, wood) make up the lion’s share (84% in 2023) of energy supply (Figure 2.1). Amongst those, ageing coal-fired TPPs are the region’s main source of electricity generation and energy, except in Albania. Close to 50% of electricity in the region is generated from coal (Figure 2.2), which accounts for 42.6% of total primary energy supply (TPES) (Figure 2.1).

Figure 2.1. Coal, oil and traditional biomass biofuels dominate (84%) the energy supply in the Western Balkans

TPES by source (ktoe) (left hand-side) and % (right hand-side), 2023

Note: Data for Albania, Bosnia and Herzegovina and Kosovo are for 2022 instead of 2023.

Source: Eurostat (2025[1]), Complete energy balances, https://ec.europa.eu/eurostat/databrowser/view/nrg_bal_c/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_bal.

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Biofuels – largely fuelwood – are the largest renewable energy source in the Western Balkan region, accounting for 12.5% of TPES and 59.2% of renewable energy supply in 2023. As a result, the region has a higher share (28.7%) of renewables in total final energy consumption (TFEC) than in the European Union (24.5%) and above the EU-wide target of 20% of renewables in final energy consumption (as set out in the 2009 EU Renewable Energy Directive [RED] (2009/28/EC)). Fuelwood used for heating and cooking constitutes the majority of those biofuels. Although considered as a (traditional) renewable energy source, combustion of fuelwood in outdated equipment (stoves and ovens) and current practices (e.g. burning undried wood) render this particular biomass a major contributor to emissions of particulate matter smaller than 2.5 microns in size (PM2.5), which are associated with heavy air pollution and high rates of premature deaths (OECD, 2022[2]; Eurostat, 2025[1]).

Figure 2.2. Electricity generation is largely based on coal and hydropower

Electricity generation by fuel (% of total), 2023

Note: Data for Albania, Bosnia and Herzegovina and Kosovo are for 2022 (instead of 2023).

Source: Eurostat (2025[1]), Complete energy balances, https://ec.europa.eu/eurostat/databrowser/view/nrg_bal_c/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_bal.

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Hydropower accounts for the second-largest share (after coal) in the region’s electricity mix and is the second-largest renewable source (after biomass). Hydropower accounts for 36.5% of total renewable energy supply (Figure 2.3 – Panel A) and 40% of electricity generation, making up 89.6% of renewables in electricity generation (Figure 2.3 – Panel B). Total installed hydropower capacity was approximately 8.3 gigawatts (GW) in 2022, with 7.5 GW from large hydropower plants (HPPs) and 0.8 GW from small hydropower plants (SHPPs) (Energy Community Secretariat, 2023[3]). Renewable energy action plans, formulated following a 2012 decision by the Energy Community Ministerial Council, rely heavily on hydropower, with targets ranging from 79% of planned power from renewables in Kosovo to 96.5% in Albania. To meet these targets, Western Balkan economies introduced incentive schemes directed largely at hydropower, especially SHPPs. Over the past decade, the number of SHPPs more than quadrupled in the region. While SHPPs remain secondary in terms of electricity generation, they create significant environmental destruction and absorb financial incentives that could otherwise be directed to other types of renewables. In this region, they are also often linked to corruption and illicit permitting (OECD, 2022[2]).

Use of wind and solar power remains marginal across the region. Together, they account for only 4.3% of renewable energy supply (Figure 2.3 – Panel A) and 9.3% of renewable electricity generation (Figure 2.3 – Panel B). In 2023, total installed capacity amounted to 1 011 MW of wind power and 1 028 MW of solar. Even though installed wind capacity has more than doubled since 2018 and solar capacity has increased by 16-fold, they still represent only small shares of the estimated, cost-competitive potential of 12.2 GW (8.3%) for wind and 4.4 GW (23.3%) for solar (IRENA, 2024[4]).

Figure 2.3. The regional renewable energy and electricity mix is dominated by hydropower and biofuels

Note: Data for Albania, Bosnia and Herzegovina and Kosovo are for 2022 (instead of 2023).

Source: Eurostat (2025[1]), Complete energy balances, https://ec.europa.eu/eurostat/databrowser/view/nrg_bal_c/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_bal.

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Natural gas is present in the energy mix of only four of the six Western Balkan economies and plays an important role only in Serbia and North Macedonia. Natural gas accounts for 14.3% of TPES in Serbia and 11.3% in North Macedonia, but for only 2.8% in Bosnia and Herzegovina and 1.8% in Albania. (Montenegro and Kosovo do not use gas.) In Serbia in 2023, natural gas was mostly used by industry (64%), followed by district heating companies (23%) and households (13%). In North Macedonia, the breakdown is the iron and steel industry (50%), food, drink and tobacco industries (14%) and district heating companies (10%). Serbia, North Macedonia, and Bosnia and Herzegovina import natural gas largely from Russia (Eurostat, 2025[1]).

In recent years, Western Balkan economies have achieved major developments in establishing legislative frameworks for incorporating additional renewables into power sectors and announcing new investment projects. In April 2023, Albania reformed its framework legislation for renewables, with incorporation of a Renewable Energy Operator as a key feature in the institutional structure. Additionally, solar and wind auctions have been implemented since 2018. Since 2020, some 240 MW of solar photovoltaic (PV) plants have been allocated. In 2023, 222 MW of onshore wind capacity was allocated. North Macedonia has been conducting renewable energy auctions since 2019, using both feed-in tariffs and feed-in-premium models. Serbia adopted a Law on the Use of Renewable Energy Sources in 2021, which introduced auctions for large-scale projects. A first auction – for 400 MW of wind and 50 MW of solar – was held in June 2023, as part of a three-year auction plan. Kosovo launched its inaugural 100 MW solar PV auction in 2023 and approved a reformed renewables law in April 2024 (OECD, 2022[2]; Energy Community Secretariat, 2023[5]; Government of Kosovo, n.d.[6]).

Some Western Balkan economies depend heavily on electricity imports; others are self-sufficient or net exporters

North Macedonia and Albania are strongly dependent on electricity imports and have been the region’s largest net electricity importers over the period 2018-23 (Figure 2.4 – Panel A). In North Macedonia, this reflects a decline in lignite production coupled with insufficient investment in alternative sources for electricity generation. Albania’s hydropower electricity generation is rainfall-dependent and highly volatile; the economy turns to imports when low water levels reduce generation. As such, its net electricity imports are highly volatile (Figure 2.4 – Panel B).

Kosovo and Serbia were previously self-sufficient in electricity generation but have become more dependent on imports. While Kosovo is less dependent on electricity imports than North Macedonia and Albania, its imports have become more volatile since 2012. This reflects frequent outages of Kosovo’s old and unreliable TPPs along with increased seasonal demand. Previously self-sufficient, Serbia’s electricity imports increased sharply in 2022 due to insufficient investment in maintenance and upgrading of infrastructure.

Figure 2.4. Net electricity import dependence varies across the Western Balkan region

Source: Eurostat (2025[1]), Complete energy balances, https://ec.europa.eu/eurostat/databrowser/view/nrg_bal_c/default/table?lang=en&category=nrg.nrg_quant.nrg_quanta.nrg_bal.

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Montenegro and Bosnia and Herzegovina are largely self-sufficient in electricity generation. Substantial endowments of hydropower and lignite reserves have helped Bosnia and Herzegovina become a net electricity exporter. Despite being strongly dependent on hydropower and experiencing large fluctuations in electricity generation and imports (as for Albania), Montenegro’s average net electricity imports are low and have declined over the last decade. This reflects the scaling down and eventual closure (in 2021) of the economy’s large aluminium plant, which accounted for up to 40% of electricity demand prior to 2009. As a result, Montenegro is largely self-sufficient in electricity generation and may be able to increase exports in the future.

High international energy prices made the years 2021-22 particularly challenging for net electricity importers in the Western Balkans. North Macedonia, Albania, Kosovo and Serbia were all net importers in 2021-22. High European electricity prices drove up the cost of imports and, thus, the cost of supplying electricity in these economies. In parallel, regulated prices for households and small consumers limited the pass-through into end-user prices of these higher supply costs. As a result, importing economies had to use large amounts of public resources to fund imports.

Power generation, heating and transport drive high levels of pollution and CO₂ emissions in the region

Heavy reliance on burning coal, combined with outdated technologies for power generation, are the main drivers of high air pollution and greenhouse gas (GHG) emissions. They also contribute to low levels of overall energy efficiency. Power generation from coal is the region’s largest source of CO₂ emissions (Figure 2.5 – Panel A). Many coal-fired TPPs also emit other harmful substances (e.g. sulphur dioxide [SO₂], nitrogen oxides [NOx] and dust), contributing to air pollution. In 2023, the 18 coal-fired TPPs in four Western Balkan economies (Serbia, Bosnia and Herzegovina, Montenegro and North Macedonia) produced 43% more harmful SO₂ emissions than the combined emissions of all 221 coal TTPs in the European Union. In Bosnia and Herzegovina, North Macedonia, and Serbia, SO₂ pollution is typically five to eight times the legal limit that these economies committed to under National Emissions Reduction Plans (NERPs) (Figure 2.5 – Panel B). Coal combustion is also the second-largest source of PM 2.5 emissions regionally and, by far, the leading source of transboundary pollution. Burning coal and wood in homes is the second-largest source of air pollution in the region. In 2015, burning coal and wood in homes (for cooking and heating) generated about half of PM 2.5 emissions in Kosovo and North Macedonia, and almost 60% in Bosnia and Herzegovina (OECD, 2022[2]).

Figure 2.5. Coal-heavy electricity generation is one of the main sources of air pollution and CO₂ emissions in the Western Balkan region

Note: A. No data were available for Albania; B. For Kosovo, calculations are based on the main official NERP ceiling.

Source: Panel A. IEA (2023[7]), Database, https://www.iea.org/data-and-statistics/data-product/world-energy-statistics-and-balances; Panel B. Ciuta et al. (2024[8]), Comply or Close Six years of deadly legal breaches by Western Balkan coal plants, www.complyorclose.org.

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CO₂ emissions in the Western Balkans are high in relation to economic output. GDP per capita in the region is only one-fifth of the EU level and only 17% of the OECD average. Despite this, CO₂ emissions per capita (4.85 tonnes [t]) in the Western Balkans are almost four-fifths of the EU average (5.6 t) and almost two-thirds of the OECD average (8.03 t) (Figure 2.6 – Panel A). This translates into high CO₂ emissions in relation to economic output in the region: CO₂ emissions per unit of GDP in the Western Balkans are twice that of EU and OECD averages (Figure 2.6 – Panel B). If Western Balkan economies were to continue on this carbon-intensive development trajectory, their CO₂ emissions per capita would increase dramatically as economic development increases. Without intervention, when they reach the current level of GDP per capita in the European Union, their CO₂ emissions per capita would be 4.5 times the current EU average and three times the current OECD average. When they reach the current level of GDP per capita in the OECD, their CO₂ emissions would be 5.2 times the current EU average and 3.6 times the OECD average (World Bank, 2025[9]).

Figure 2.6. CO₂ emissions are high in the Western Balkan region given its level of economic development, both per unit of economic output and per capita

CO₂ emissions per capita (t per capita) (Panel A), CO₂ emissions per unit of GDP (kg per 2015 PPP USD) (Panel B)

Note: In Panel B data for Bosnia and Herzegovina, Philippines, Uruguay and Costa Rica come from 2022 instead of 2023.

Source: IEA (2023[7]), Database, https://www.iea.org/data-and-statistics/data-product/world-energy-statistics-and-balances.

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Price regulation and cheap electricity remain important features of energy systems in the Western Balkans

Electricity prices in the Western Balkans have remained considerably lower than those in comparable EU economies. This is particularly true of household prices, which are largely in the regulated market, although it is also the case for non-household customers in both regulated and deregulated segments. Contrary to practices in most EU countries, households in the Western Balkans pay lower energy prices than companies – except in Montenegro, where prices are roughly the same for both. At 0.097 EUR/kWh on average in the Western Balkans in 2024 (including taxes), prices were about one-third of the EU average (0.29 EUR/kWh). For industrial consumers, the price difference was somewhat less pronounced between the Western Balkans average (0.13 EUR/kWh) and the EU average (0.22 EUR/kWh) (Figure 2.7). Lower energy prices and taxes drive most of the difference between prices in the EU and in the Western Balkans, while network charges are similar.

Figure 2.7. Electricity prices in the Western Balkan region are lower than elsewhere, and lower for households than for firms

Electricity prices including taxes and levies for medium sized household and non-household consumers, first semester of 2024, EUR/kWh

Source: Eurostat (2025[10]), Electricity prices for non-household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_205/default/table?lang=en&category=nrg.nrg_price.nrg_pc; Eurostat (2025[11]), Electricity prices for household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_204/default/table?lang=en&category=nrg.nrg_price.nrg_pc.

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Low electricity prices are due to extensive price regulation in the Western Balkans, which has served as a social measure, broadly redistributing value to customers, particularly households. The majority of households and a large share of small customers in the region receive electricity under regulated prices, served by universal service suppliers (USS). For commercial customers with higher voltage needs than households, electricity markets in the region have advanced with various forms of deregulation (Table 2.1). When prices are set below market prices – and even below production costs1 – they constitute a form of induced support, transferring value from producers to households. Cross-subsidies are also pervasive in the region (see Chapter 3), with regulated business customers paying higher tariffs to compensate universal service providers for shortfalls linked to below-market prices for households.

Table 2.1. The scope of electricity price regulation remains large in most Western Balkan economies

Electricity retail market deregulation in the Western Balkans

	Regulated supply (universal service supply)	Deregulated market
Albania	Household and small consumers connected at 0.4 kV (USS) Customers connected at 6 kV (SLR)1	Customers connected at 10, 20, 35 kV and high voltage
Bosnia and Herzegovina	Households and small customers connected at 0.4 kV	Customers connected at 10, 35 and 110 kV
Kosovo	Household and non-household customers (in the latter case, with an annual turnover of less than EUR 10 million or fewer than 50 employees)	High-voltage customers connected at 110, 220 and 400 kV
North Macedonia	Deregulated (Households and other small customers can choose to be supplied by the USS)
Montenegro	Entire retail market formally deregulated but entirely served by the state-owned electricity company EPCG
Serbia	Households and small customers (less than 1 kV connection and at least one other criterion – fewer than 50 employees, annual turnover below EUR 10 million, or annual consumption below 30 000 kWh)	All other customers

1. For customers served by the supplier of last resort (SLR), prices should be set to encourage them to choose market providers. In Albania, however, SLR prices were also lower than market benchmark prices in 2021-22.

Source: Energy Community Secretariat (2021[12]; 2022[13]; 2023[3]), Annual implementation reports.

Price regulation in the Western Balkans also covers a significant portion of wholesale market activity. In Albania, the state-owned production company (Korporata Elektroenergjitike Shqiptare [KESH]) has the obligation to sell electricity to both the SLR and the USS at below-market prices2 (Energy Community Secretariat, 2023[3]). In Kosovo, a bulk supply agreement is in force between the incumbent producer (Korporata Energjetike e Kosovës [KEK]) and the USS (Kosovo Electricity Supply Company [KESCO]), which transfers value down the value chain. In Albania, Bosnia and Herzegovina, and Kosovo, electricity procured to cover transmission and distribution losses is not systematically procured in the market. Also, in much of the region, prices for several services (e.g. balancing and ancillary services) are regulated, partly due to the dominant position of incumbent producers. Much of this will need to be reformed as the region moves towards EU integration and participation in its integrated electricity market (Box 2.1).

Montenegro and North Macedonia stand out in the region in terms of progress in electricity market deregulation. Wholesale markets are liberalised in North Macedonia and competitive market-based processes are used to procure balancing services to keep the electricity grid stable and balanced, and electricity to cover transmission and distribution losses. Supplier switching has increased since 2019, reaching 13.7% of customers in 2022. While 47% of electricity is supplied in the open market, all households are still supplied by the USS at regulated prices (ERC, 2023[14]). Since 2017, electricity prices have been fully deregulated. Price increases were initially capped at 7% in 2017 and reduced to 6% for 2018 and 2019 (Government of Montenegro, 2020[15]). Network costs remain regulated by REGAGEN, which sets revenue limits for transmission (CGES) and distribution (CEDIS) operators based on justified operational and investment costs. Despite the absence of price regulation, domestic electricity prices have remained low, even during periods of rising international energy prices.

Box 2.1. The EU acquis and electricity market regulation

The Western Balkans are striving to develop an integrated electricity market, as part of their integration into the EU electricity market. The characteristics of electricity, particularly the need to balance supply and demand, have historically led to the sector having a vertically integrated industrial structure and to being highly regulated. The prevailing regulatory body for the electricity market – the EU acquis – aims to ensure competitive markets across service activities, namely production and supply of electricity. Conversely, networks transporting electricity (transmission and distribution networks) are treated as natural monopolies due to the fixed investments required (EU, 2019[16]; Energy Community Secretariat, 2012[17]).

Network activities are regulated to ensure fair and transparent access and competition. Electricity market network activities are regulated for two main reasons. First, to provide third-party access to distribution and transmission networks in a non-discriminatory and transparent manner. Second, to generate the funds necessary to maintain and invest in the network and to fulfil any additional market support activities (e.g. balancing supply and demand). Regulated prices for network activities are set to ensure that operators are compensated for costs and acquire reasonable profit margins. The regulation ensures that prices are not too high, which would discourage entry by others in multiple segments of the market and ultimately drive up costs to end-users.

The EU acquis on regulation in retail energy markets focuses on access to energy, the free choice of supplier, transparency and consumer protection. Access by household customers and small enterprises is subject to universal service, ensuring the right to be supplied with electricity within the territory at competitive, easily and clearly comparable, transparent and non-discriminatory prices (EU, 2019[16]). Since market activities are deemed competitive, regulation sets rules on how electricity supply contracts should be marketed and on the contractual rights of suppliers and customers, including the right to switch suppliers (von der Fehr et al., 2022[18]).

End-user pricing in the EU acquis is to be set freely in the markets, with the possibility of certain derogations. The Electricity Directive allows for public intervention in price setting for energy-poor or vulnerable households, subject to several conditions and often limited in time and scope. It also allows for price interventions in a transition period, for example as competitive markets are established, under conditions to foster competitive markets. These might include setting prices above cost and not introducing cross-subsidies (EU, 2019[16]).

The “energy crisis” of 2021-23 put maximum pressure on price regulation and budgets, leading to some reforms

Price regulation has shielded household customers from price variations in most of the region over the period 2018-23. In Albania, regulated household tariffs stayed fixed (at 9.5 ALL/kWh) between 2018 and 2022, even as the average tariff needed for cost-recovery by the USS increased by 22% in 2021 (13.5 ALL/kWh) (ERE, 2023[19]). In the Federation of Bosnia and Herzegovina (FBiH), the tariff schedule for households remained unchanged despite rising production costs, increasing international prices and significant increases in tariffs elsewhere in Bosnia and Herzegovina (by 26% in 2023 in Brčko District, and in 2022 in RS, with the introduction of block tariffs) (EnC, 2023[20]).

Western Balkan economies extended regulation measures during the period of high and volatile prices in 2021-22. These extensions sought primarily to ensure security of supply and to protect certain sectors against price increases. North Macedonia issued decisions that required the independent joint-stock company (TE-TO) to generate a specific volume (160 MW) of electricity daily and sell it to the state-owned supplier (Elektrani na Severna Makedonija [ESM]) under a price cap. Some economies also extended the scope of regulated pricing. In Albania, the free market supplier (a subsidiary of the state-owned distribution company Operatori i Shpërndarjes së Energjisë Elektrike [OSHEE]) had the obligation to buy from KESH and sell electricity at the same price to cover the distribution losses of OSHEE. In North Macedonia, a temporary measure limited margins for retail market participants to 10% (phased out in April 2023). In Bosnia and Herzegovina, in 2021, despite high international energy prices, both FBiH and RS limited price increases for industrial customers, keeping them below cost-recovery levels. Similarly, Serbia responded to high international prices by introducing a ceiling of 75 EUR/MWh on retail prices under free market contracts in January 2022, effectively extinguishing the already small free market (only 3.8% of final customers in 2021) and forcing the state-owned electric power utility company Elektroprivreda Srbije (EPS) to supply 100% of customers.

Sustaining low prices during the energy crisis of 2021-22 required significant fiscal transfers on the part of governments in the Western Balkans. North Macedonia provided EUR 279 million to support ESM after imposing on it the obligation to supply the USS with 90% to 100% of its demand, without being able to pass on the additional costs. Albania provided ALL 20 billion (close to EUR 200 million) to KESH to compensate for the obligation to supply other actors in the system at below-market prices in 2022. Notably, this was a year in which Albania was a net electricity importer (importing 921 GWh in net terms) and faced particularly high import prices (ERE, 2023[21]). Serbia directed significant support to EPS and to Srbijagas (state-owned natural gas company) to allow them to continue providing energy at prevailing tariffs despite rising international markets. This support, a combination of liquidity and budget support, was about EUR 3 billion according to Serbia’s independent Fiscal Council (Fiscal Council, 2023[22]).

To better align prices with the cost of supply, electricity importers increased regulated electricity prices in 2022-23. Electricity importing economies, in which the cost of supply increased significantly, took this decision. Household electricity prices were increased in Kosovo in 2022 and in Bosnia and Herzegovina (in both RS and Brcko district) in early 2023. North Macedonia increased regulated electricity prices for households in 2022, by approximately 30% on average, by introducing a block tariff system with four consumption bands. Prices for the highest band increased the most (138.7%) while those for the lowest band increased only marginally (5.5%). Serbia increased both household and corporate electricity prices in 2022 and 2023, following a stand-by agreement with the International Monetary Fund (IMF). Montenegro did not raise end-user tariffs; since its net electricity imports were very low between 2019 and 2021, its cost of supply did not increase substantially despite high international energy prices. In the autumn of 2021, Albania introduced a cap on electricity prices for domestic consumers, despite the economy’s strong reliance on electricity imports.

State-owned enterprises dominate the energy sectors of the Western Balkans

Electricity production markets in the Western Balkans remain very concentrated, with a major role played by incumbent SOEs. in Kosovo (KEK) and Serbia (EPS), the single SOE incumbent firm produces more than 95% of electricity, as do the three local monopolies in Bosnia and Herzegovina (Eurostat, 2025[23]). In Montenegro, three state-owned power plants produced 86% of electricity in 2022 (REGAGEN, 2022[24]). In North Macedonia, state-owned ESM accounted for 67% of generation in 2022 (ERC, 2023[14]). The market is less concentrated in Albania, where state-owned KESH produced 55% of electricity in 2022, with independent producers making up over 44% of the market3 (ERE, 2023[21]) (Figure 2.8).

Figure 2.8. SOEs play an important role in energy markets in the Western Balkans

Proportion of national electricity generated by incumbent SOEs (2018-22 average)

Note: SOEs’ sectoral distribution is based on central government SOEs for Albania, Kosovo, Montenegro and Serbia, and includes sub-national

SOEs for Bosnia and Herzegovina and North Macedonia

Source: Authors’ calculations based on data collected from regulator reports in the region; Eurostat (2025[23]), Energy market indicator, https://ec.europa.eu/eurostat/databrowser/view/nrg_ind_market/default/table?lang=en&category=nrg.nrg_market.

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Supply markets are also largely dominated by SOEs. While most customers in the region can freely choose their electricity supplier, many opt to remain with the incumbent suppliers. In most of the region (Albania, Bosnia and Herzegovina, Kosovo, North Macedonia and Serbia) customers can freely switch suppliers (Energy Community Secretariat, 2023[5]). However, the dominant position of incumbents and the scope of regulation prompt the great majority of customers to remain with the incumbent supplier. In Bosnia and Herzegovina, only 2.6% of final consumption was supplied to customers that switched suppliers. In Montenegro, multiple suppliers are licenced, but Elektroprivreda Crne Gore (EPCG) continues to supply households. In Serbia, only 3.8% of customers were supplied at non-regulated prices in 2022 – largely industrial customers not eligible for regulated supply.

The predominance of SOEs in energy sectors in the region can be an obstacle to the emergence of competitive markets and to implementing a green transition. The range of subsidies and support measures that support SOEs in production, transmission, distribution and supply of energy also contribute to locking them into existing modes of production. In turn, the current organisation of power markets limits competition in deregulated segments.

Many of the region’s energy SOEs grapple with productivity challenges linked to staffing and high wage expenditures. Across the region, the electricity and gas sector is a particularly important part of public sector employment, accounting for over a quarter of total SOE employment. Comparing relative wage bills of the region’s main electricity producers with Poland’s PGE (chosen due to its significant share of coal-based electricity) and the OECD average as benchmarks show significantly higher wage bills for the SOE’s involved in coal-based electricity production in the region (Figure 2.9).

Figure 2.9. Some energy producers in the Western Balkans have relatively large wage bills

Wage expenditure as a share of revenues, average 2018-22, percentage

Note: The STAN benchmark is the mean of the ratio between wages and gross output for the sector “Electricity, gas, steam and air conditioning supply” in the STAN industrial analysis database for the period 2010-19.

Source: Data collected from companies’ statements. STAN benchmark based on OECD (2020[25]) Structural Analysis (STAN) database 2020 ed., http://dotstat.oecd.org/Index.aspx?DataSetCode=STANI4_2020.

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Insufficient investments in maintenance and modernisation by SOEs reflect the challenges of limited productivity, energy prices below cost-recovery and other obligations. Across the Western Balkan economies, investment in rehabilitation and modernisation of coal-fired TPPs, as well as for equipment for pollution abatement and monitoring, tends to be low and is frequently postponed. Insufficient investment in maintenance and modernisation of distribution and transmission infrastructure means losses are high. The resulting low quality of service contributes to collection losses and/or non-payment of electricity bills (Miljevic, Mumović and Kopac, 2019[26]). In 2021, distribution losses ranged from 9.7% of domestic supply in Bosnia and Herzegovina to 16.1% in Albania and averaged 13.0% in the region – double the EU average of only 6.3%. Miljevic, Mumovic and Kopac (2019[26]) estimate that investment needs for rehabilitation and modernisation of coal-fired TPPs and for pollution abatement and monitoring equipment for these plants alone (i.e. not counting other infrastructure needs) amounts to EUR 1 billion in the Western Balkan region.

Excessive public service obligations can prevent competitive markets from emerging. OECD guidance on Corporate Governance of SOEs (OECD, 2015[27]) and on competitive neutrality (OECD, 2012[28]) highlights the challenges to good governance and competition that can emerge when public service obligations are imposed on SOEs that are also active market participants. The guidance calls for the cost of the public service obligation to be transparently estimated and for SOEs to receive fair compensation for this cost. Concerns exist regarding both over- and under-compensation, which could tilt the market in favour of SOEs and may also reflect inefficient use of public resources.

Compensation for public service obligations, particularly for below-market pricing, lacks transparency in some cases in the region. Given Bosnia and Herzegovina’s capacity for electricity exports, associated revenues have allowed producing firms to sustain supply at low prices. When no explicit compensation existed, profitability worsened, leading to the need for significant transfers, particularly during the energy crisis. In some cases, such transfers were earmarked. Transfers from the Government of North Macedonia to the producing company ESM are a case in point. They were earmarked to allow ESM to fulfil the public service obligation imposed during 2021-22 and channelled to a dedicated account. In turn, specific amounts were allocated to providing additional electric energy (through the production and procurement of coal, heavy oil and gas) while the remainder was set to procure electricity from renewables suppliers (State Audit Office, 2022[29]). In other cases, however, financial support granted in the form of loans has later been written off, as in the case of Srbijagas and EPS who received EUR 1.4 billion and EUR 296 million of public support, respectively, without any earmarking or accountability mechanisms being put in place.

The role of incumbent power utilities in the transition remains to be defined. Auction processes have led to the entry of new firms. To meet the region’s decarbonisation objectives, they will need to be significantly scaled up. Incumbents can also be incentivised to invest in renewables, which requires changing existing forms of their support and incentives to better align with stated objectives. Even if incumbents do not become leaders in renewables production, they play critical roles in providing power system flexibility and security of supply (Kušljugić, Miljević. Damir and Rajaković, 2023[30]). Given that analysis of barriers to renewables deployment identifies political and regulatory barriers as the most severe – and given the political connections of incumbent power companies – incentivising their engagement is all the more important (Falcan et al., 2022[31]).

The region’s commitments to the EU, market integration, and global climate targets set out an ambitious agenda for further transformation of the energy sector

Western Balkan economies have committed to ambitious climate goals and emissions reduction targets within the context of EU integration and the UNFCCC COP process. Through the 2020 Sofia Declaration on the Green Agenda for the Western Balkans, the 2019 Clean Energy for All Europeans Package, and the 2021 Energy Community Decarbonisation Roadmap (Energy Community Secretariat, 2021[32]), the economies of the region committed to concrete actions and ambitious emissions reduction targets by 2030 and to the EU’s 2050 climate-neutrality target. Along similar lines, the second generation of NDCs submitted by the economies of the region were significantly more ambitious than the first ones and point in the same direction of effort as the targets of the Energy Community Secretariat, even if not fully aligned (Table 2.2).

National Energy and Climate Plans (NECPs) are intended to be the cornerstones for the green transition in the Western Balkans region. NECPs are part of the Clean Energy for All Europeans package adopted in 2019, which aims to: establish a new energy rulebook; move away from fossil fuels towards cleaner energy; and deliver on EU commitments for reducing GHG emissions under the COP21 Paris Agreement. To achieve stated objectives, NECPs address energy efficiency, renewables, GHG emissions reduction, interconnections, and research and innovation. They build on modelling and financial assessments to set out concrete pathways for decarbonisation. Assessed investments range from EUR 4 billion in Kosovo to EUR 27 billion in Serbia. The economies of the region have advanced with the preparation of these plans. Albania, North Macedonia and Serbia have adopted their NECPs. Bosnia and Herzegovina, Kosovo, Montenegro are in the pre-final peer review stage with the Energy Community Secretariat. Following the adoption of NECPs, effective implementation will be crucial to translate commitments into real progress on decarbonisation, energy security, and economic resilience.

Table 2.2. Western Balkan economies have boosted the ambition of their GHG emissions reduction targets

GHG emissions reduction targets in Western Balkan economies

	GHG emission reduction targets by 2030
Economy	NECP	Energy Community targets (2022)	Enhanced NDC (2021)	Original NDC
Albania	-18.7% compared to business as usual	+53.2% compared to 1990 levels	-20.9% compared to business as usual	-11.5% compared to the baseline scenario
Bosnia and Herzegovina	-19.05% compared to 2021 levels1	-41.2% compared to 1990 levels	-33.2% to -36.8% compared to 1990 levels	+20 to -3% compared to 1990 levels
Kosovo	-16.3% compared to 2016 levels1	-16.3% compared to 2016 levels	Voluntary NDC: -16.3% compared to 2016 levels	No target
Montenegro	-24.7% compared to 2022 with existing measures1 -126.3% compared to 2022 with additional measures	-55% compared to 1990 levels	-35% compared to 1990 levels	-30% compared to 1990 levels
North Macedonia	-82% compared to 1990 levels	-82% compared to 1990 levels	- 51% compared to 1990 levels	-30 to -36% compared to business as usual
Serbia	-40.3% compared to 1990 levels	-40.3% compared to 1990 levels	-33.3% compared to 1990 levels	-9.8% compared to base-year (1990) emissions

1. NECP has not yet been adopted.

Source: Government of Albania (2021[33]), Albania Revised NDC, https://unfccc.int/sites/default/files/2022-08/Albania%20Revised%20NDC.pdf; Government of Bosnia and Herzegovina (2021[34]), Nationally Determined Contribution of Bosnia and Herzegovina (NDC) for the Period 2020-2030, https://www.researchgate.net/publication/270816670_Drought_Conditions_and_Management_Strategies_in_Bosni; Government of the Republic of North Macedonia (2021[35]), Enhanced Nationally Determined Contribution, https://unfccc.int/sites/default/files/NDC/2022-06/Macedonian%20enhanced%20NDC%20%28002%29.pdf; Government of Montenegro (2021[36]), Updated NDC for Montenegro, https://unfccc.int/sites/default/files/NDC/2022-06/Updated%20NDC%20for%20Montenegro.pdf; Government of the Republic of Serbia (2022[37]), Nationally Determined Contribution (NDC) of the Republic of Serbia for the 2021-2030 period, https://www.rs.undp.org/content/serbia/en/home/library/crisis_prevention_and_recovery/covid-19-socio-economic-response-, Energy Community (2022[38]), Decision of the Ministerial Council of the Energy Community No. 2022/02/MC-EnC, https://www.energy-community.org/dam/jcr:421f0dca-1b16-4bb5-af86-067bc35fe073/Decision_02-2022-MC_CEP_2030targets_15122022.pdf.

In combination with climate commitments, the Energy Community and EU frameworks aim for liberalisation and market integration as key principles for the energy sector. In addition to the Sofia Declaration and the Clean Energy for All Europeans Package, the Third Energy Package of 2009, contains bold commitments towards energy reform (Box 2.2). The Third Energy package is a core element of legislation to which Western Balkan economies have committed through the Energy Community Treaty. It encompasses five areas: unbundling; independent regulators; co-operation among regulators; cross-border co-operation; and open and fair retail markets. Key legislative acts of the Electricity Integration Package were adopted by the Energy Community’s Ministerial Council on 15 December 2022.

At the wholesale level, Western Balkans economies have made progress in developing competitive electricity markets. Most notable is the launch of trading systems, including: a continuous intraday market in the Serbian power exchange (SEEPEX) in July 2023; power exchanges in Montenegro (MEPX) and Albania (ALPEX) in April 2023 and in North Macedonian (MEMO) in May 2023. Since January 2024, Kosovo has participated in the ALPEX day-ahead market. Future coupling of electricity markets within the region and with EU countries is likely to make Western Balkan markets more competitive.

Box 2.2. Three key frameworks for energy sector reform and climate neutrality: The EU Third Energy Package (2009), the Clean Energy for all Europeans Package (2019) and the Sofia Declaration (2020)

The EU Third Energy Package (2009) and the Clean Energy for All Europeans Package (2019)

The EU Third Energy package, adopted by the European Parliament and Council of the European Union in 2009, provides a legislative framework for four key reforms: opening of electricity and gas markets in the European Union; enhancing cross-border trade; improving access to diversified sources of energy; and reducing market concentration.

The Package consists of two directives and three regulations that provide common rules for the internal market in electricity and natural gas, along with conditions for access to the network for cross-border exchange of electricity and natural gas.

Core elements of the package include:

• Ownership unbundling, by splitting vertically integrated power utilities into separate corporate entities for generation of electricity and its subsequent transmission.

• Establishing an independent systems operator (ISO) and an independent transmissions operator (ITO).

• Establishing a national regulatory authority (NRA) for each member state and the Agency for the Cooperation of Energy Regulators (ACER) as a collaborative forum for NRAs.

The Energy Community’s Ministerial Council adopted four legal acts of the Third Energy Package in 2011: the Electricity Directive; the Natural Gas Directive; the Electricity Regulation; and the Natural Gas Transmission Networks Regulation.

In 2019, parts of the Third Energy Package, most importantly, the Electricity Regulation and the ACER Regulation, were revised as part of the Clean Energy for All Europeans Package. Through the new package, the European Union overhauled its energy policy framework to move away from fossil fuels towards cleaner energy and to deliver on the EU’s Paris Agreement commitments for reducing GHG emissions. For natural gas markets, the Third Energy Package is still applicable.

Five legislative acts of the EU’s Clean Energy for All Europeans were adopted by the Energy Community’s Ministerial Council on 30 November 2021, partly replacing the Third Energy Package legislation:

• The new Renewables Directive 2018/2001 introduces new rules on support schemes, which shall be granted in an open, transparent, competitive, non-discriminatory and cost-effective manner. It also includes measures to tackle administrative barriers. Additionally, it strengthens the existing sustainability criteria for biofuels and bioliquids and extends it to biomass fuels. For the first time, it sets an indicative target for increasing the use of renewables in the heating and cooling sector. The directive also introduces the concepts of renewable self-consumption and energy communities.

• The new Energy Efficiency Directive 2018/2002 sets stronger measures for buildings renovation and savings in end-use sectors, as well as rules on metering and billing of thermal energy, especially with respect to multi-apartment and multi-purpose buildings. Each year, Contracting Parties will be required to renovate at least 3% of the total floor area of buildings over 250 m2 that are owned and occupied by the central government of the Contracting Party. The directive also requires that Contracting Parties achieve new energy savings of at least 0.8% annually in end-use sectors (e.g. buildings, industry and transport).

• The Governance Regulation 2018/1999 sets common rules for planning, reporting and monitoring on energy and climate policies and targets. It also ensures that planning and reporting are synchronised with the ambition cycles under the Paris Agreement.

• The Electricity Directive 2019/944 and Risk Preparedness Regulation 2019/941 aim to establish a new flexible and market-based electricity market design to facilitate integration of a greater share of renewables. It will also offer opportunities for self-consumers.

• The Gas Security of Supply Regulation 2017/1938 upgrades the existing security of supply in the Energy Community by ensuring a uniform legal and regulatory framework in the Contracting Parties, comparable to that in the European Union.

  Renewables, energy efficiency and GHG reduction targets for 2030 were adopted at the subsequent Ministerial Council in 2022.

The Sofia Declaration on the EU Green Deal (2020) and the Decarbonisation Roadmap (2021)

The Sofia Declaration endorses the EU’s draft Climate Law for its application in the Western Balkans, once adopted in the European Union. The Climate Law is the legislative expression of the goals set out in the European Green Deal (EGD), which is for Europe’s economy and society to become climate‑neutral by 2050. The Law seeks to ensure that all EU policies contribute to this goal, with all sectors of the economy playing their part.

Specific actions that the Western Balkan Contracting Parties have committed to include:

• Introducing carbon pricing instruments and aligning these with the EU emissions trading system (EU ETS).

• Decreasing and gradually phasing out coal subsidies, strictly respecting state aid rules as applicable already through the Energy Community.

• Introducing market-based renewables support schemes.

• Actively participating in the Coal Region in Transition initiative for the Western Balkans.

To support initiatives under the Sofia Declaration, the European Union adopted (October 2020) the Economic and Investment Plan for the Western Balkans. The plan offers EUR 9 billion for flagship projects in the energy sector that target decarbonisation, with investment directed into expanding renewables and renovation of buildings. Support through the new Western Balkans Guarantee Facility, under the EU External Action Guarantee and the European Fund for Sustainable Development Plus, could mobilise investments of another EUR 20 billion in the next decade.

Together with the EU’s Clean Energy for All Europeans Package, a Decarbonisation Roadmap was adopted by the Energy Community’s Ministerial Council on 30 November 2021. This roadmap outlines a pathway towards 2030 energy and climate targets and towards mid-century climate neutrality for the Energy Community. It includes introduction of an emission trading mechanism in and/or among Contracting Parties by 2025.

Source: (OECD, 2022[2]), Multi-dimensional Review of the Western Balkans: From Analysis to Action; European Commission (2022[39]), Third Energy Package, https://energy.ec.europa.eu/topics/markets-and-consumers/market-legislation/third-energy-package_en; European Commission (2020[40]), Western Balkans Summit in Sofia: Important steps taken to advance regional co-operation to boost socio-economic recovery and convergence with the EU, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2051; Energy Community (2020[41]), Secretariat welcomes Sofia Declaration on the Green Agenda for the Western Balkans, https://www.energy-community.org/news/Energy-Community-News/2020/11/11.html; Energy Community (2021[42]), Fact Sheet, https://www.energy-community.org/news/Energy-Community-News/2021/11/30.html; (Energy Community, 2021[43]), Decarbonisation Roadmap for the Contracting Parties of the Energy Community, https://www.energy-community.org/events/2021/11/MC.html; European Commission (2022[44]), Clean Energy for All Europeans Package, https://energy.ec.europa.eu/topics/energy-strategy/clean-energy-all-europeans-package_en; Energy Community (2011[45]), 9^th Energy Community Ministerial Meeting Conclusions, https://www.energy-community.org/; European Commission (2020[46]), Western Balkans: An Economic and Investment Plan to support the economic recovery and convergence, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1811.

Competitive retail markets and phasing out fossil fuel and coal subsidies, are commitments at the core of this report. Both objectives are core to the Energy Packages, the Sofia Declaration and the region’s Decarbonisation Roadmap of 2021 (Box 2.2). The remaining chapters of this report provide detailed analysis and recommendations to achieve these objectives.

The region’s commitments also include the introduction of carbon pricing and emissions trading systems (ETS), which has gained urgency with the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM). CBAM (Box 2.3) is designed to level the playing field between EU manufacturers and foreign producers by ensuring that imported goods face a similar carbon cost as goods produced within the EU. It will enter into effect in 2026. Importers in the EU will be required to purchase certificates equivalent to the embedded emissions in their imported goods. Carbon pricing mechanisms and ETS in the country of origin will be taken into account and can help reduce or eliminate CBAM levies, depending on their level relative to the EU’s ETS. Given the importance of the EU as an export market for the economies of the Western Balkans, making progress on carbon pricing and the establishment of ETS, as per the Sofia Declaration and Decarbonisation Roadmap is urgent.

The introduction of carbon pricing and emissions trading will increase the costs of electricity production, making reform along the lines of the recommendations in this report even more urgent. Effective carbon pricing and emissions trading will require the creation of monitoring, reporting and verification (MRV) mechanisms that would track the GHG emissions related to production and consumption of energy. In the case of carbon pricing, taxes or other levies would then be added so as to make producers and consumers pay for the respective emissions. In the case of an ETS, producers would have to buy emission certificates and incur or pass on the related costs. Both mechanisms are intended for use in competitive energy markets with free prices. The region’s current systems of price regulation would imply a significant cost burden on energy producers and commensurate pressure on governments for support, which would defy the purpose of incentivising emissions reduction in production and use of energy. The recommendations of this report can help bring the energy systems of the region closer to readiness for CBAM, carbon pricing and ETS.

Box 2.3.  The EU Carbon Border Adjustment Mechanism: Impacts and policy responses in the Western Balkans

The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a policy designed to impose a carbon price on imports of certain goods to prevent carbon leakage and encourage greener production methods globally. It aims to level the playing field between EU producers, who incur carbon costs under the EU Emissions Trading System (ETS), and whose free allocations are being phased out, and foreign producers without equivalent carbon pricing mechanisms. CBAM introduces a carbon price on imported goods from emissions-intensive sectors such as steel, cement, aluminium, fertilizers, electricity, and hydrogen. Importers will be required to purchase CBAM certificates, priced according to the EU ETS, with the quantity determined by the embedded carbon emissions of the goods and payable into the EU budget. The mechanism entered into effect in October 2023 with a three-year transitional period focused on emissions reporting. From 2026, financial obligations will gradually apply, while free allowances under the EU ETS for domestic producers will begin to phase out (European Commission, 2025[47]).

CBAM will pose challenges for carbon-intensive sectors for certain economies in the region. Electricity generation – particularly coal-based, except in Albania – and heavy industrial processes are especially vulnerable. Bosnia and Herzegovina and Montenegro are among the most exposed, largely due to their substantial power exports. In North Macedonia and Serbia, the iron and steel sectors are expected to be notably impacted. Without domestic carbon pricing, CBAM could reduce output in North Macedonia’s aluminium and steel sector by nearly 2% and result in the loss of up to 1 500 jobs, according to the World Bank’s MINDSET model (World Bank, 2024[48]). Serbia’s iron and steel exports could decline by 31% annually by 2035, while its power sector may see a 27% drop in exports and a 44% reduction in both output and employment (World Bank, 2024[49]). Kosovo is expected to be less affected, given its limited exports to the EU, while Albania’s reliance on hydropower offers it a relative buffer. According to the World Bank Relative CBAM Exposure Index, Albania might even gain competitiveness in comparison to the average EU producer of the goods it exports (DENA, 2024[50]).

However, the long-term macroeconomic impact of CBAM is expected to be limited. World Bank MINDSET models for Serbia and Kosovo estimate only a modest negative effect on GDP by 2035 – approximately -0.23% and -0.3%, respectively – assuming no mitigating measures are implemented. While CBAM may lead to reduced exports and lower domestic production of affected goods, economies are expected to adapt by decreasing imports, reallocating labour and capital, and seeking new market opportunities (World Bank, 2024[49]).

Establishing a national carbon pricing system can directly offset CBAM charges. Under CBAM regulations, if an economy has its own carbon pricing mechanism, the corresponding cost is deducted from the CBAM levy, reducing the financial burden on exporters. In addition, there is a specific provision for electricity imports, which may be exempted from CBAM charges if the exporting country meets a set of conditions. In addition to implementing a carbon pricing mechanism these include setting a 2050 climate neutrality goal and adopting the EU acquis on electricity, renewables and environment (DENA, 2024[50]).

Montenegro leads in implementation, other Western Balkan economies are at various stages of planning and developing carbon pricing mechanisms. Economies in the region have committed to implementing carbon pricing as part of the Sofia Declaration, Green Agenda Action Plan, and the Energy Community’s Decarbonization Roadmap. As of April 2025, Montenegro is the only Western Balkan economy with an operational carbon pricing system, having introduced a national ETS in 2020 that primarily covers its power and industrial sectors (though at a price lower than EU ETS). The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) has spurred increased policy discussions and government engagement on carbon pricing across the region. However, in most cases, these efforts remain in the early stages of scoping and impact assessment. National Energy and Climate Plans (NECPs) reveal intentions to establish cap-and-trade systems in Albania and Bosnia and Herzegovina, and to introduce carbon taxes in North Macedonia and Serbia (Energy Community Secretariat, 2024[51]).

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Notes

← 1.  Given the age of the capital stock in electricity generation in the region, production costs of existing power plants are relatively low. Even so, current regulated electricity prices do not fully reflect production costs. Indeed, setting cost-reflective prices is a key objective in the draft National Integrated Energy and Climate Plan of Bosnia and Herzegovina, as part of the market integration pillar (Government of Bosnia and Herzegovina, 2023[52]).

← 2.  This system of obligations reverberates through the system of regulation and price determination: When the USS (FSHU) submits costs to the regulator for tariff determination, the calculation includes procurement of electricity from KESH at regulated below-market prices.

← 3.  State-owned Lanabregas makes up the reminder with 0.4% of electricity generation in 2022. The Ashta hydroelectric power plant, built and operated privately under a PPP project is included among independent producers.