Reducing carbon intensity is a top priority for Montenegro, which aims to cut greenhouse gas emissions by 55% by 2030 compared to 1990 levels. Yet coal generates over 40% of electricity, which is sold at prices much below the full cost of emissions and the European integrated market. This chapter provides an inventory of price measures and subsidies and develops scenarios to analyse the impacts of energy market reform on prices, households, and the economy. It also analyses social transfers and how existing programmes could be enhanced to mitigate the negative social consequences of reform. Drawing on the analytical results and on peer-learning exchange with key stakeholders in Montenegro, the chapter outlines five key policy recommendations for energy sector reform in Montenegro: align electricity prices with market rates, address energy poverty and protect vulnerable customers, upgrade the national grid, support the transformation of Pljevlja, and promote social equity and expand opportunities through greater gender inclusion.
Energy Prices and Subsidies in the Western Balkans
Abstract
Reducing the carbon intensity of its energy sector is a key priority for Montenegro. Montenegro has set ambitious goals for climate action, including a 55% emissions reduction target by 2030 (compared with 1990 levels) and a commitment to phase out coal-fired electricity production. To achieve its objectives, the economy must address two interrelated challenges. First, the future of the Pljevlja coal-fired thermal power plant (TPP) – which currently generates over 40% of Montenegro’s electricity – will play a pivotal role in shaping its decarbonisation strategy. Second, while Montenegro has made significant progress in laying the foundation for energy market development and regional integration, the dominance of a state-owned enterprise (SOE) as the sole supplier has impeded the growth of stronger competition.
Strengthening Montenegro’s resilience to price shocks will be central to facilitating reforms that address the above challenges. The three main actions needed – a shift from fossil fuels to intermittent renewable energy sources, energy market development and progressive integration into regional energy markets – are likely to increase the economy’s exposure to price volatility. Anticipating the economic and household impacts of future energy price shocks is crucial for strengthening Montenegro’s energy markets while also preparing social support systems for changes.
The OECD’s Just Transition project aims to assist Montenegro in anticipating and adapting to energy price changes. By combining the Inventory of Energy Subsidies and Support Measures in the Western Balkans with household and macro-economic data analysis, the project offers valuable insights to inform policy processes within each economy in the region. Firstly, the Inventory provides a comparative regional perspective on energy sector support, including through prices and other mechanisms. Secondly, by recognising the potential economic and social impacts of price changes, macro- and micro-modelling assess the effects on both the individual economies and their populations.
Inventory of energy subsidies and support measures for Montenegro
Current support to the energy system is costly for the government of Montenegro:
Keeping energy prices low resulted in EUR 1.16 billion of induced support to consumers over the observed period 2018-23. Of total support, about EUR 632 million accumulated during the energy crisis in 2022, accounting for 10.7% of gross domestic product (GDP) in that year. In comparison, EUR 3.2 billion is required to achieve the decarbonisation goals set in Montenegro’s National Energy and Climate Plan (NECP).
The energy sector received EUR 88 million in financial support during the period 2018-23. Most (EUR 67 million) was credit support while the remainder (EUR 21.1 million) was mainly fiscal support – in the form of direct grants – for vulnerable consumers.
Feed-in tariffs were effective in providing reliable revenue streams when domestic energy tariffs were higher than market tariffs, allowing for long-term project financing of key renewable energy production projects. When the energy crisis drove up market prices, selling at fixed prices resulted in an opportunity cost for renewable energy producers of around EUR 100 million in 2021-23.
Scenarios for inclusive and resilient decarbonisation in Montenegro
Electricity prices have been kept low in Montenegro by the incumbent state-owned producer and supplier, despite international market turbulence. While retail prices are liberalised in Montenegro, the incumbent SOE, Elektroprivreda Crne Gore (EPCG), has kept them below market levels for most customers, often even below production costs. Even before the energy crisis, household retail prices were 11.7% below a synthetic market‑consistent benchmark price. The situation was exacerbated during the energy crisis, during which Montenegro was a net exporter of electricity. EPCG could afford to pay the opportunity cost of maintaining fixed retail energy prices despite high international prices thanks to increasing revenues through exports and sales to other actors at market prices. As of 2023, household retail prices were 89% lower than market-consistent reference prices.
Keeping prices low to protect vulnerable households has the effect of transferring significant value to those who do not need the support. Since better-off households consume more electricity in Montenegro, they accrue a disproportionate share of the benefits of low pricing. On average, the 20% richest households receive 31% of the benefits while the poorest 20% – corresponding approximately to those at risk of poverty – receive only 12%.
A gradual increase in electricity prices would help generate funds for future investment with relatively mild economic impacts in Montenegro. This chapter finds that simulated increases in electricity retail prices would have a contractionary impact on the economy. A 10% increase would cost the economy 0.16% of GDP. The direct impact on production costs and demand through increased electricity prices would be moderated by increased public revenues linked to higher earnings of energy SOEs. To avoid increasing poverty and hardship, the impacts on households would need to be mitigated. Modelling shows, however, that compensating those at risk of poverty would require only a fraction of the additional income generated – EUR 1.58 million in the case of a 10% price increase against EUR 24.5 million in additional earnings for the energy supplier. Fully adjusting to market-consistent prices (a 70% increase in retail prices) would mean a more significant departure from the status quo. While triggering a fall in output of almost 1 percentage point, it would increase profits of electricity suppliers by 205%. However, it would require a significant increase in targeted cash benefits to compensate those in need (by 68% to compensate those at risk of poverty).
The impacts of future increases in the price of coal-fired electricity will depend critically on the development of Montenegro’s domestic market. The price of coal-fired electricity will need to increase to reflect the cost of carbon emissions and other externalities, which the current emissions trading system (ETS) in Montenegro does not fully capture. Under the current practice of maintaining stable prices, this could be done with limited costs to the economy. That would imply, however, significant transfers from EPCG to the state, seriously undermining the financial health of the company and, therefore, prospects for necessary investment in capacity. At the other extreme, under a regime that fully adjusts to the market, the impacts of a sizeable carbon charge (equivalent to a charge of 67 EUR/MWh) would be largely passed on to consumers through increased prices and would lead to an economic contraction of 1.2%. In this situation, however, increased incomes for energy producers and funds raised through the charge itself would generate surpluses, allowing for future investments in capacity.
To compensate those households at risk of poverty form being negatively impacted by future energy price increases, Montenegro’s social protection system would need several adjustments. At present, Montenegro relies on direct energy subsidies to support those in need. A large proportion of such subsidies are linked to non-means-tested benefits and therefore do not necessarily target those at risk of income or energy poverty. Rather than encouraging energy saving and efficiency behaviours, these direct subsidies tend to stimulate electricity consumption. Delinking such subsidies from actual electricity consumption would appear a more efficient strategy. Targeting support to mitigate the impacts to the poor of future electricity price increases would require significantly strengthening means-tested benefits. This is counter to the direction taken in recent social protection reforms, which instead expanded categorial benefits for children and mothers.
Policy recommendations for Montenegro
Montenegro should gradually align electricity prices with market rates to ensure they reflect production and supply costs. Between 2018 and 2023, subsidised electricity prices provided EUR 1.16 billion in induced support to consumers in Montenegro. A clear five-year strategy should be developed to close the gap between current and market-based prices. Public awareness programmes should explain the role of tariffs in funding energy infrastructure, while government agencies should build capacity for setting and communicating cost-reflective tariffs.
Safeguarding vulnerable populations through targeted support will ensure that the energy transition is both economically sustainable and socially just. Supporting energy-poor households is essential for a fair and inclusive energy transition. Between 14% and 30% of households in Montenegro face energy poverty, struggling with heating costs, utility bill arrears or low energy efficiency. Current electricity subsidies are not well-targeted, with only 13% of recipients qualifying through means-tested programmes. To address this, Montenegro should improve the targeting of financial support and introduce non-financial measures, such as incentives for energy efficiency improvements tailored to energy-poor households.
To foster the uptake of more renewable energy, Montenegro should enhance the grid. Montenegro aims to achieve a 50% share of renewable energy in its gross energy consumption by 2030. Strengthening the grid network is critical, including the gradual integration of new power plants, accommodating all planned prosumers, and improving the management of transmission and distribution systems. Digitalisation, automation and energy storage solutions (such as battery systems) will enhance grid resilience. A supportive legislative environment should encourage investments in both renewable energy and energy storage and should include accountability measures to ensure investor commitments are fulfilled.
Given Plevlja’s pivotal role in Montenegro’s energy sector, it is essential to bolster the company by identifying new economic opportunities and enhancing its capacity to implement the Just Transition Roadmap. As Montenegro transitions away from coal, the Pljevlja region must be supported to mitigate the social and economic impacts of potential power plant closures. The coal mine and power plant currently employ around 20% of the local workforce, making economic diversification essential. Retraining programmes should help workers transition to industries with similar skill requirements, such as cement, brick, styrofoam and gypsum manufacturing. Incentive schemes should be developed to support entrepreneurship and small- and medium-sized enterprises (SMEs), fostering job creation and economic growth. In parallel, it would be important to focus on implementing Montenegro’s Just Transition Roadmap, with a structured action plan, defined timelines and dedicated funding. A Just Transition Council should oversee progress, and ETS revenues and environmental fees should be earmarked exclusively for projects that support the Pljevlja region.
Finally, Montenegro should promote gender inclusion in the energy transition as a way to promote social equity and maximise related benefits. Increasing women’s participation in energy-related fields (such as engineering, technology and management) can help address labour shortages and boost productivity. To support evidence-based policy making, Statistical Office of Montenegro (MONSTAT) and other statistical bodies should improve the collection and analysis of sex-disaggregated data to capture the roles of women as consumers, producers and prosumers. In-depth gender analyses can identify barriers and opportunities unique to women, ensuring that policies address their specific needs. Gender-sensitive subsidies should be introduced to support women entrepreneurs and prosumers, promoting their economic empowerment and contributing to a more inclusive energy transition.
How to read this chapter
This chapter is structured into five sections. It begins by examining Montenegro’s energy system in the context of its decarbonisation challenge. It then analyses public support to the energy sector using the Inventory of Energy Subsidies and Support Measures for the Western Balkans. The third section analyses the distributional impact of keeping electricity prices below their market value and compares the value it delivers to social protection programmes. The fourth section develops reform scenarios, assessing the potential impact of energy reforms on prices, household budgets, employment, and fiscal space. The final section presents key policy recommendations for energy sector reform, based on the findings and outcomes of the peer-learning workshop held in Montenegro.
Montenegro’s electricity mix is primarily composed of domestic hydropower and fossil fuels, with energy imports playing a significant role until 2021
Hydropower is the largest source of electricity generation in Montenegro, contributing 53% of the economy’s total electricity generation in 2023 (Figure 10.1 – Panel A). Montenegro’s hydropower capacity is dominated by two large hydropower plants (HPPs), Perućica (307 megawatts [MW]) and Piva (342 MW), which together account for 92.1% of the installed hydropower capacity. Small hydropower plants (SHPPs) make up the remaining 7.9% but have drawn criticism for their environmental and social impacts, as well as their association with corruption and illicit permitting practices (Ciuta, I.; Gallop, P.; CEE Bankwatch Network, 2022[1]). Montenegro is planning further hydropower expansion, including projects such as the Komarnica (172 MW) and potential partnerships for the construction of HPPs Kruševo and Ćehotina. Hydropower remains central to Montenegro’s strategy for renewable energy development (Bankwatch, 2024[2]).
Coal is Montenegro’s second-largest source of electricity, contributing 38% to the national energy mix (Figure 10.1 – Panel A). All of the economy’s coal-generated electricity comes from the Pljevlja TPP, which has a capacity of 225 MW and is fuelled by lignite from the nearby Pljevlja coal mine. The plant is a significant polluter, failing to meet the EU Industrial Emissions Directive standards for dust, sulphur dioxide (SO2) and nitrogen oxide (NOx) emissions. In 2021, the Energy Community Secretariat (ECS) initiated a dispute settlement against Montenegro due to the Pljevlja TPP exceeding its allowed operational time. While Montenegro is modernising the plant to align with EU directives, the European Commission has expressed concerns that the upgrades will not fully address the environmental issues. The plant is scheduled for temporary closure in 2025 for ecological reconstruction and there are plans to shut it down in 2041.
Note: Data for 2023 are preliminary data retrieved from MONSTAT’s energy balances that are reported to Eurostat.
Source: Eurostat (2025[3]), 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, MONSTAT (2024[4]), Energy statistics, https://www.monstat.org/eng/page.php?id=39&pageid=39.
Within the Western Balkans, Montenegro has the highest share of wind power in its electricity mix, accounting for 7.5% of total generation in 2023. This surpasses the regional average of 3% and reflects the economy’s efforts to diversify its energy sources. Montenegro has two operational wind farms: Krnovo (72 MW), which became functional in 2017, and Mozura (46 MW), operational since 2019 (Energy Community Secretariat, 2021[5]; Masdar, 2021[6]; Bankwatch, 2021[7]). Several new wind energy projects are underway, including the Gvozd wind farm (54.6 MW) and Sinjajevina 1 and 2 (402.6 MW). Solar energy, in contrast, remains underdeveloped, with an installed capacity of just 2.6 MW contributing only 0.4% to the electricity mix in 2023. Montenegro is, however, beginning to expand its solar capacity. In 2021, EPCG and Ecofond started the initiatives Solari 3000+,Solari 500+ and Solari 5000+ to promote renewable energy by subsidising and financing the installation of solar photovoltaic (PV) systems of up to 10 kilowatts (kW) for residential buildings and up to 30 kW for businesses (UNDP and Berger, 2023[8]).
Historically dependent on energy imports to meet domestic demand and manage hydropower fluctuations, Montenegro has significantly reduced this reliance in recent years. Since gaining independence in 2007 until 2021, the economy relied on imports to meet its electricity demand and to address electricity production challenges due to hydropower variability. Between 2007 and 2021, it imported an average of 668 GWh of electricity per year (Figure 10.1 – Panel B). More recently, dependence on imports has been reduced through favourable conditions for hydropower, increased electricity generation from both lignite and wind farms, and reduced consumption. A key factor in this demand reduction is the closure of the Podgorica aluminium plant, which once accounted for up to 40% of the economy’s electricity consumption (Bankwatch, 2021[7]; Ralev, 2022[9]). However, the impact of climate change on hydrological conditions could affect Montenegro’s energy production, increasing the need for imports to meet demand in future. Projections indicate that, under severe climate scenarios, Montenegro could face GDP losses of up to 7.9% by 2050 due to riverine floods, heat stress and droughts (World Bank, 2024[10]).
Montenegro’s advances in decarbonisation and competitive energy market development
Decarbonising Pljevlja: a crucial step towards a just transition in Montenegro
The Pljevlja TPP and the Pljevlja coal mine play important roles in domestic electricity production. The Pljevlja TPP predominantly relies on locally sourced lignite. In turn, approximately 85-90% of annual coal production of the Pljevlja mine is supplied to the Pljevlja TPP. In 2023, the TPP contributed 38% of total electricity production (REGAGEN, 2024[11]). The importance of the Pljevlja TPP increases significantly during dry periods (such as the summer of 2022) when low rainfall means hydropower plants – which normally cover over 70% of the economy’s generation – cannot produce sufficient electricity. Despite growth in electricity generated from renewables, these sources are currently insufficient to ensure energy security of Montenegro, which makes Pljevlja TPP crucial for maintaining a stable supply (UNDP and Berger, 2023[8]).
The municipality of Pljevlja currently struggles with severe air pollution and environmental degradation, largely driven by the coal industry and residential heating practices. The region frequently reports some of the worst air quality in Montenegro, with levels of particulate matter smaller than 2.5 microns (PM2.5) significantly affecting public health. The town has a high rate of pollution-related premature deaths, with Pljevlja’s population losing an average of 2.5 years of life expectancy due to exposure to harmful pollutants (compared with 1.5 years in Nikšić and 8 months in Podgorica). Additionally, the local landscape suffers from land and water contamination linked to coal mining activities and industrial waste from the power plant (UNDP and Berger, 2023[8]).
Closures of the Pljevlja TPP and the coal mine are likely to have significant social implications for the local community and for Montenegro. The coal mine is the largest employer in the municipality of Pljevlja, providing over 1 100 jobs, while the power plant adds another 158 positions. Together, they account for approximately 20% of all employment in the municipality. The workforce is predominantly male, with many workers nearing retirement age; over 62% of mine employees are older than 40. Educational levels among these employees largely reflect a reliance on vocational and technical training, with around 77% having completed secondary education, and only a small proportion holding higher qualifications (Figure 10.2 – Panel B). Salaries at both the mine and the TPP are above the national average (UNDP and Berger, 2023[8]).
Source: UNDP and Berger (2023[8]), The road map of the just transition of Montenegro: Final draft, including comments from relevant stakeholders.
Advancing energy market development and regional integration will be crucial for enhancing efficiency in energy production and supply in Montenegro
The energy market in Montenegro is characterised by a high level of market concentration, dominated by a major producer and supplier. EPCG, an SOE, is the dominant producer and supplier in Montenegro’s electricity market, fully meeting the needs of the energy sector, despite the presence of other licensed producers. Although customers have the legal option to choose alternative suppliers, the majority continue to rely on EPCG. Other producers exist, predominantly in the field of renewable energy. In 2023, for example, 26 licensed privileged producers were operating 39 facilities. Additionally, EPCG acts as the supplier of last resort (SLR) and provides service to vulnerable customers (REGAGEN, 2023[12]). In 2022, EPCG produced more than 80% of Montenegro’s total electricity generation (Figure 10.3).
Proportion of national electricity generated by incumbent SOEs (2018-22 average)
Source: Authors’ elaboration based on economies’ electricity balances.
Although the energy market of Montenegro is formally open, boosting competition could deliver greater efficiency and improve offers in the sector; in turn, this could lead to more competitive electricity prices, providing an important buffer against potential price volatilities. Despite the presence of other producers in Montenegro (REGAGEN, 2024[13]), the market remains highly concentrated and dominated by EPCG. Strengthening energy market competition can drive down costs and improve service quality. In the United Kingdom, research indicates that lack of competition in the energy market before 2010 – when six large companies controlled 99% of the customer base – contributed to a sharp rise in average energy bills. Between 2004 and 2010, the average annual energy bill increased significantly, from GBP 605 to GBP 1 060, reflecting the impact of limited market dynamics on pricing (Platt, 2012[14]). In recent years, by contrast, a substantial number of new entrants to the UK retail energy market has resulted in falling wholesale prices and reduced volatility in wholesale markets (CEER, 2017[15]). A notable case study in Montenegro is the Kombinat aluminijuma Podgorica (KAP) aluminium smelter, which was forced to shut down in 2021 due to rising electricity prices. While it is difficult to determine the exact outcome for the smelter, greater competition in Montenegro’s energy market might have allowed it to seek alternative arrangements through long-term contract pricing, helping to sustain its operations.
A well-functioning retail energy market, regardless of market size, depends on having both a sufficient number of active suppliers and robust competition. While smaller countries often have fewer suppliers than larger markets, this does not necessarily mean that competition is weaker or that energy prices are higher. Economies such as Ireland, Lithuania, Luxembourg, Portugal and Slovenia typically have fewer active suppliers but still maintain competitive energy markets. The presence of an adequate number of suppliers is critical to fostering a healthy competitive environment, but the quality of competition ultimately determines market effectiveness (CEER, 2017[15]).
Montenegro has been making important progress in developing competitive electricity markets. The establishment (in 2023) of a day-ahead electricity market marked a significant milestone in developing the wholesale electricity market. Operated by BELEN (Crnogorska Berza električne energije), the day-ahead market had 25 registered participants as of 26 June 2024, with an additional two participants in the process of registration. During its first year of operation, price movements on BELEN closely mirrored those observed on the Hungarian Power Exchange (HUPX) (REGAGEN, 2024[11]). Regarding third-party access rules, which ensure open and non-discriminatory access for all market participants to energy infrastructure (e.g. transmission and distribution networks), Montenegro has established clear rules, technical requirements and costs, which are published for all grid levels. Distinct access and usage tariffs are set for each voltage or pressure level, ensuring transparency and fairness in grid usage. Further development is needed in some areas, however. Currently, trade licences are not mutually recognised within the Energy Community, which can create barriers to trade and co-operation. Addressing this gap will be crucial for enhancing the overall efficiency and integration of the energy market in the Western Balkan region (OECD, 2024[16]).
Montenegro is also actively advancing regional energy market integration. Stronger regional market integration could enable Montenegro to access more diverse energy sources, which will be crucial given the anticipated closure of the Pljevlja TPP in 2041 (Spasic, 2024[17]). Full integration with Italy is expected by end of 2026 in line with the recently adopted Reform Agenda 2024-2027 (Spasic, 2024[18]). The launch of the day-ahead market marks a significant step in these efforts. Additionally, Montenegro is engaged in regional initiatives such as the Coordinated Auction Office of South East Europe (SEECAO), demonstrating its commitment to regional energy co-operation. The absence of an institutionalised forum for market participants, however, limits collaborative efforts to improve congestion, manage reliability and develop market rules. Establishing such a platform would foster more effective co-operation in optimising market operations and addressing shared challenges (OECD, 2024[16]).
Anticipating and adapting to price changes will be key to support implementation of the necessary energy sector reforms
Efforts to decarbonise Montenegro are expected to raise energy prices, highlighting the need to anticipate economic and household impacts and implement policies to cushion future price shocks. The closure (in 2041) of the Pljevlja power plant will lead to a substantial loss of generation capacity, necessitating replacement with alternative energy sources or imports, which is likely to drive up energy prices for the population. Additionally, the EU Carbon Border Adjustment Mechanism (EU CBAM), which requires that carbon pricing be implemented to avoid the need for border adjustment payments, is likely to put upward pressure on electricity prices in Montenegro in the short to medium term.
The energy system in Montenegro is characterised by below-cost electricity prices
Currently, electricity prices in Montenegro remain low compared with international standards. Household electricity prices are about three times lower than the EU average (Figure 10.4). As in other Western Balkan economies, businesses in Montenegro face higher electricity prices than households. However, this price gap is lowest in Montenegro.
Electricity prices including taxes and levies for medium-sized household and non-household consumers, first semester of 2024, EUR/kWh
Note: European Union shows the average for 27 EU countries. Data for the Western Balkans is the simple average of the WB6 economies.
Source: Eurostat (2025[19]), 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[20]), 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.
Electricity prices in Montenegro have not always been cost-reflective. An analysis of operating costs, along with wage costs, compensation and other personnel expenses, per unit of electricity delivered by ECPG for the period 2019-23 reveals that these unit costs were generally higher than the prices charged to the distribution system operator (DSO) for losses. They were also higher than the prices delivered to the KAP aluminium smelter.1 Until 2022, unit costs were lower than the prices for distribution customers, but they exceeded these prices in 2022-23. Additionally, the prices for the transmission system operator (TSO) for losses consistently remained higher than the unit costs (Figure 10.5).
Source: Based on data extracted from the EPCG’s Annual Financial reports.
Although Montenegro no longer regulates electricity energy prices – except for network costs – prices have remained low, even during periods of rising international energy prices. The economy’s price regulation framework has undergone significant evolution. Full deregulation of electricity prices was completed in 2017 after a gradual transition. From 2007 to 2011, authorities set prices annually. Between 2011 and 2015, Montenegro adopted a three-year regulatory period and opened the market to alternative suppliers. Since 2017, electricity prices have been fully deregulated, with the exception of a regulatory mechanism that limits tariff increases. Such increases were initially capped at 7% in 2017 and reduced to 6% for 2018 and 2019 (Government of Montenegro, 2020[21]). Network costs, however, remain regulated by the Energy and Water Regulatory Agency of Montenegro (REGAGEN), which caps the revenue of transmission (CGES) and distribution (CEDIS) operators, based on justified costs for operations, maintenance and grid development. Operators also purchase electricity on the open market to cover grid losses, passing these costs to consumers. REGAGEN ensures these costs remain efficient and aligned with market trends. Despite the absence of price regulation, domestic electricity prices have not tracked international price surges and have stayed within the 6% annual increase cap (Figure 10.6).
Household electricity prices
Source: Deta extracted from REGAGEN reports.
Significant profits generated by CGES from cross-border electricity exchanges via the submarine cable between Italy and Montenegro helped to shield consumers from rising electricity prices in 2022-23. Commissioned in late 2019, the submarine interconnection was supported by close co-operation between the regulatory bodies in Italy and Montenegro, which established a regulatory and legal framework aligned with EU standards. This collaboration led to the selection of SEECAO, based in Podgorica, to allocate cross-border capacity with Italy in 2020, 2021 and 2022. Following the commissioning of the submarine interconnection, annual profits increased almost tenfold for CGES – from EUR 3.6 million in 2019 to EUR 35.7 million in 2023 (Figure 10.7). The revenue from these exchanges is deducted from the amount the regulator allows CGES to collect from network charges, thus reducing the costs required for transmission system operations and development. As a result, this revenue indirectly lowers the costs borne by transmission system users, positively impacting electricity prices for buyers and producers. Had these revenues not been included in the regulatory allowed revenues of the TSO for the period 2020-22, prices for using the electricity transmission system would have been about 13% higher for connected customers and 52% higher for connected producers (REGAGEN, 2023[12]).
Net profits achieved by transmission system operator (CGES)
Source: REGAGEN (2024[13]), Izvještaj o stanju energetskog sektora Crne Gore za 2023, https://regagen.co.me/wp-content/uploads/2024/08/2024.26.07_REGAGEN_-IZVJESTAJ-O-STANJU-ENERGETSKOG-SEKTORA-CRNE-GORE-ZA-2023.pdf.
Despite low prices, electricity bills burden many households in Montenegro
The cost of electricity for households, as a share of income, is relatively high in Montenegro, making price increases politically sensitive. In Montenegro, an annual consumption of 5 000 kWh costs, on average, 6.2% of GDP per capita, compared with 7.9% in the Western Balkans and just 4.5% in the European Union (both including taxes and levies) (Figure 10.8). This implies a higher cost burden on households in Montenegro relative to EU households but lower than in some Western Balkan economies. Raising electricity prices in Montenegro would impose significant social costs, which explains strong political resistance to such measures.
Average price (including taxes) for 5 000 kWh for households (% of GDP per capita), 2024
Note: Price data is S1-2024, GDP data is for 2023 from WDI.
Source: Authors’ calculations based on Eurostat (2025[20]), 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; World Bank (2025[22]), World Development Indicators, https://databank.worldbank.org/source/world-development-indicators.
Energy poverty remains a concern in Montenegro. Data collected by the Survey on Income and Living Conditions (SILC) reveal that between 14% and 30% of households experience energy poverty. This is based on subjective indicators that reflect their inability to keep homes adequately warm, being in arrears on utility bills or living in housing that prevents appropriate energy efficiency (Figure 10.9). Additionally, energy costs represent a substantial burden for many households, with those in the lower half of the income distribution particularly affected. For households in the bottom four income deciles, the median share of energy expenditures exceeds 10% of their disposable income (Figure 10.10). This 10% threshold is widely used as a measure of energy poverty across the European Union.
Note: For all panels data for North Macedonia is for 2020, for Albania it is 2021, for Montenegro and Serbia 2022 and for Kosovo 2018.
Source: Eurostat (2025[23]), Inability to keep home adequately warm, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01/default/table?lang=en; Eurostat (2025[24]), Arrears on utility bills, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdes07/default/table; Eurostat (2025[25]), Total population living in a dwelling with a leaking roof, damp walls, floors or foundation, or rot in window frames or floor, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdho01/default/table.
Energy expenditure as a share of total consumption expenditure, 2017
Source: Energy Community Secretariat (2021[26]), Study on Addressing Energy Poverty in the Energy Community Contracting Parties, https://www.energy-community.org/dam/jcr:f201fefd-3281-4a1f-94f9-23c3fce4bbf0/DOOREIHP_poverty_122021.pdf.
Energy poverty and income poverty overlap only partially in Montenegro. To obtain a comprehensive household-level database of income and energy expenditure, this project merged (through cross-sample imputation) data on income from SILC 2020 and data on energy consumption from the household budget survey (HBS) 2017. According to these data, 25.5% of households spent over 10% of their income on energy as of 2019 (and are considered energy-poor in this report). This can be compared with the risk-of-poverty rate of 19.5%. The overlap between the two sets of households is very imperfect. While 54% of households at risk of poverty are also energy-poor (representing 10% of households), as many as 16% of those not at risk of income poverty were identified as energy-poor (13% of all households) (Figure 10.11). Anti-poverty programmes can reduce the vulnerability of the income-poor to energy poverty. Indeed, it would be desirable to also support those at risk of poverty with energy efficiency measures to ensure their energy needs are better managed (RES Foundation/TheGreens/EFA, 2023[27]). In contrast, most households that are energy-poor are not income-poor; as such, they are unlikely to be targeted by anti-poverty programmes and would require specific support to mitigate the risks of energy poverty.
Share of energy-poor by status relative to risk of (income) poverty, %
Note: Energy poverty is measured by the share of households spending 10% and more of their income on energy.
Available data show that women in Montenegro are more vulnerable to energy poverty. A dedicated gender and energy analysis carried out as part of this project shows that different groups face different challenges when it comes to accessing and using energy. In Montenegro, traditional gender roles shape energy use, with women primarily handling energy-intensive household tasks (such as cooking and cleaning), while men focus on occasional repairs and structural energy investments (such as solar panels). Women, particularly in rural or low-income households, face greater challenges in accessing affordable energy due to financial constraints, physical demands and limited information, often relying on cost-saving measures and community support. Men, often with greater financial resources, tend to lead major energy decisions, while women face barriers in dealing with energy providers and navigating reforms, leaving them less empowered to make informed energy choices (Box 10.1).
This project incorporates a gender perspective by examining how energy reforms impact men and women as consumers, workers and decision makers. To explore gender differences in energy consumption, access, and responses to reforms, the study applied a qualitative research methodology, including focus group discussions and roundtables across the Western Balkans.
Specific to Montenegro, based on 7 focus groups with 67 participants1 conducted across Bjelo Polje, Bar, Podgorica and Niksic, key findings reveal the significant role gender plays in energy consumption, cost-saving strategies and responses to reforms. Findings from the focus groups and desk research provide an overview of the role of gender in shaping energy consumption, access to opportunities, decision making and energy poverty in Montenegro. Key insights, as well as inputs from participants, are as follows:
Women predominantly rely on energy for household tasks (e.g. cooking, cleaning, heating water and washing clothes). Men primarily use energy for leisure activities (e.g. watching TV and using computers) and are minimally involved in daily household chores. In Niksic, focus groups noted that men occasionally handle energy-heavy tasks (e.g. repairs or machinery use), but these occur less frequently than women’s daily energy-intensive activities.
Managing firewood supplies requires significant physical labour, including chopping, storing and maintaining the wood. This task is usually handled by men, whereas women usually contribute by managing the stove or fireplace.
Women, particularly those heading households, face greater challenges in accessing and procuring energy sources due to financial constraints, limited physical ability and a lack of information. Elderly women and single mothers, in particular, struggle with the physical demands of firewood handling and financial barriers to switching to alternative energy sources.
Women actively manage household energy expenses through energy-saving behaviours (e.g. limiting heating and cooling, encouraging conservation, and using energy-efficient appliances). They often, especially in low-income households, shift energy use to off-peak hours to benefit from lower rates and adopt practical measures to minimise costs.
"We take into account when electricity is expensive and cheap, from 11 in the evening it is cheap, so we use it most often in order to save.” (Woman, Bijelo Polje)
Men are more likely to focus on and decide on structural energy-saving measures (e.g. improving insulation, installing solar panels and upgrading heating systems). With better access to financial resources and information, and as primary earners in many patriarchal households, men often lead major energy-efficiency investments.
“Since I installed the solar system, my bills are much lower. I think solar will be cost-effective only if it doesn’t break down, it all depends on the quality." (Man, Nikšić)
Men and women employ different coping mechanisms to manage energy costs. Men are more likely to take on additional work, seasonal labour or physically demanding tasks (e.g. chopping firewood) and often assume financial risks (e.g. borrowing or using credit). Women, in contrast, rely heavily on community support networks, sharing resources, or borrowing from friends and family. They also make sacrifices in household spending, cutting back on essentials (e.g. clothing or leisure) to ensure energy bills are paid. While men have more access to income-generating opportunities and credit, the burden of managing energy expenses often impacts women’s quality of life more directly, extending to children in low-income households.
Women, particularly in rural areas, face more barriers in seeking their rights with energy providers. They may lack the confidence or knowledge to navigate bureaucratic processes. Instances of women being unable to challenge incorrect billing or seek redress for poor service were reported frequently. Female participants expressed a sense of powerlessness when dealing with energy providers, saying that their concerns and complaints are often dismissed or not taken seriously.
“I have a problem when the power goes out, so I call the power utility; they usually don’t answer or say that the teams are in the field.” (Woman, Podgorica)
Men and women show awareness of energy reforms, particularly concerning electricity prices and tariffs, but women generally have less detailed knowledge about the specifics. While both genders expressed concerns about transparency in tariff setting, women, especially in low-income and rural households, were less informed about the mechanisms behind energy reforms, limiting their ability to make informed energy decisions.
1. The sampling of participants for focus groups in Montenegro focused on three key dimensions: income level (low vs. middle), urban vs. rural residence, and social assistance status, using ISSP databases and co-ordination with local social work centres. More women (58.2%) than men (41.8%) participated in the focus groups. Participants were aged 30 to 75. Special attention was given to vulnerable groups, including social assistance recipients and single parents, to ensure a comprehensive discussion of economic vulnerability.
To provide a basis for energy sector reforms in Montenegro and across the region, the OECD Development Centre has developed an Inventory of Energy Subsidies and Support Measures in the Western Balkans. The inventory aims to present evidence on the types and size of energy subsidies and support measures to the energy sectors of these economies. As such, it intends to raise awareness among policy makers in Montenegro and across the region about the existing energy subsidies and support measures, and their potential impacts. This has been done by using an internationally recognised methodology to develop a consistent and comprehensive description of such schemes and provide robust estimates of their volumes. The systematic overview of energy subsidies and support measures is largely based on the OECD Inventory of Support Measures for Fossil Fuels (OECD, 2024[29]). Having an inventory of energy subsidies can also be a basis for reporting on Sustainable Development Goal (SDG) Indicator 12.c.1 “Amount of fossil-fuel subsidies per unit of GDP”, which sets a target to rationalise inefficient fossil fuel subsidies that encourage wasteful consumption.
Induced support to the energy system in Montenegro
Induced support for consumers: EUR 1.16 billion through electricity prices being lower than market prices between 2018-23
Provision of electricity at below-market prices resulted in approximately EUR 1.16 billion in induced support to consumers in Montenegro between 2018-23. This induced support is calculated as the difference between reference market electricity prices and actual electricity prices in Montenegro (Figure 10.12 – Panel A). The induced support includes four schemes under which supply of electricity is at prices lower than market rates: to Uniprom for KAP aluminium smelter; to non-household consumers at various voltage levels (35, 10 and 0.4 kV); to household consumers (0.4 kV); and to the DSO (CEDIS) for grid losses.2 Most of this induced support (EUR 632 million) occurred in 2022, representing 10.7% of Montenegro’s GDP in that year (Figure 10.12 – Panel B). In 2020, induced support through low prices turned negative, primarily due to EPCG supplying electricity to non-households (35, 10 and 0.4 kV) at rates higher than the reference prices.
Note: The state-owned electricity provider EPCG has been supplying electricity at prices lower than market rates to several entities, including Uniprom’s aluminium smelter, non-household consumers at various voltage levels (35kV, 10kV, and 0.4 kV), household consumers (0.4 kV), and the distribution system operator CEDIS for grid losses.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Supply of electricity from EPCG to end users accounts for 87.3% of the total induced support to consumers in 2018-23. This includes supply of electricity at prices lower than market price to households, at a value of EUR 624 million in 2018-23, and to non-households, including customers connected to the distribution network (at 0.4, 10 and 35 kV) at a value of EUR 390 million in 2018-23 (Figure 10.13).
The remaining induced support was directed toward the KAP aluminium smelter (2018-21) and a capped electricity price for CEDIS in 2023. Montenegro’s Uniprom closed the KAP aluminium smelter in 2021 due to rising electricity costs, but prior to its closure, KAP benefitted from highly favourable tariffs. Due to a lack of more exact data, fixed annual tariffs of 45 EUR/MWh were assumed and applied until 2021 (EPCG, 2021[30]). This was significantly below market reference prices, which ranged from 77.1 EUR/MWh in 2018 to 137.7 EUR/MWh in 2023. This price disparity resulted in induced support to KAP estimated at EUR 123 million over the period 2018-21 (Figure 10.13). In 2023, CEDIS, supported by its parent company EPCG, benefitted from capped electricity purchase prices, mitigating the financial burden of its obligation to cover the cost of procuring electricity for grid losses at market rates. While market prices for CEDIS reached 124.08 EUR/MWh in 2023 – more than double the 2020 price – capped prices reduced its purchase costs to 52.91 EUR/MWh. This support, estimated at EUR 24 million, helped mitigate operational losses for CEDIS during the energy crisis (Figure 10.13).
2018-23 period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Estimates of induced support based on average energy prices in the EU are similar to the baseline estimate. In the absence of alternative counterfactual prices, the average energy and supply price component in EU markets is used as the basis for an alternative reference price (see Chapter 3). Estimates of induced support over the period 2018-23 based on the alternative benchmark amount to EUR 725 million in Montenegro. The alternative estimate is 37.5% lower than the preferred baseline estimate but remains very sizeable. Induced support calculated using EU average prices is slightly higher than baseline estimates using HUPX-based reference prices in pre-crisis years, but lower in crisis years, reflecting the lower long-term volatility of the alternative reference price series (Figure 10.14). The series reflects the importance of long-term contracts in wholesale markets and is indeed less volatile than HUPX DAM prices. The use of this series also has a number of limitations: first, it reflects not only wholesale markets but also price interventions across the EU, which makes it an imperfect candidate for a counterfactual market-based reference price; second, the available series from Eurostat does not allow the disaggregation of energy and supply prices.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Within the 0.4 kV customer segment, price differences have led to a cross-subsidies, although these have been relatively small in Montenegro in comparison to other Western Balkan economies. Over 2018-23, non-household 0.4 kV customers (e.g. small business) paid higher electricity prices, averaging 101.8 EUR/MWh than households (regardless of whether 0.4 kV households had dual-or single-tariff metering), which paid an average of 88.9 EUR/MWh. These price differences generated cross-subsidies in the amount of EUR 31 million (Figure 10.15).
2018-23 period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Other, smaller-scale forms of induced support through energy prices for consumers in Montenegro include price caps on wood pellets and subsidised pellet prices in Pljevlja. In July 2022, the Montenegrin government set a maximum price for wood pellets of 269 EUR/tonne for producers and 320 EUR/tonne for retail sales, responding to public pressure and following similar practices in the region. Under this arrangement, producers were also required to reserve 20% of output for the domestic market, with the remainder available for export. The value of this price-cap induced support was approximately EUR 1.1 million. The methodology for estimating this subsidy involved comparing Montenegro’s retail pellet prices with the Western Balkan average and multiplying the price difference by domestic pellet consumption between September 2022 and May 2023. Additionally, subsidised pellet prices for Pljevlja have been in place since 2016, aimed at providing alternative heating energy to reduce severe pollution from burning coal in the municipality. Residents are eligible to purchase up to 2 tonnes of pellets at subsidised rates. The estimated support amounts to around EUR 580 000 for 2022-23, calculated by comparing subsidised and market prices. As no data were available on quantities sold, the limitation of 2 tonnes per buyer was simply multiplied by the number of buyers; as such, the value is likely to be overestimated.
Induced support for producers: Feed-in tariffs have been a key instrument to encourage uptake of renewable energy, but showed their limitations during the energy crisis
Feed-in tariffs are a special category of induced support to renewable energy producers in Montenegro. Feed-in tariffs guarantee a purchase price for renewable generation projects, with aim to make them predicably profitable and thus encourage investment. In addition to guaranteed prices, privileged producers selected for incentive schemes can transfer their balancing responsibility to the purchasing entity. The value of balancing responsibility that may be transferred is not included in the estimates of induced support. As for other forms of induced support, the inventory calculates induced support through feed-in tariffs by comparing guaranteed prices and HUPX reference prices.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Until 2020 renewable energy producers in Montenegro benefited positively from feed-in tariffs, but rising international energy prices in 2021-22 made the obligation to supply electricity at guaranteed domestic prices a significant opportunity cost for producers. Feed-in tariffs shielded privileged producers from market volatility while also preventing them from making windfall gains when prices were high. Feed-in tariffs generated positive induced support for producers in 2018-20 of about EUR 46 million. The energy crisis shifted this dynamic, resulting in an opportunity cost of around EUR 100 million in 2021‑23 for producers that remained in the system (Figure 10.16 – Panel A). Similar trends were observed across the Western Balkans region (Figure 10.16 – Panel B).
In August 2024, Montenegro enacted the Law on the Use of Energy from Renewable Sources, which introduces an auction system to support renewable energy projects. The first auctions are anticipated in 2025. The law also establishes guarantees of origin to facilitate long-term contracts between renewable energy providers and purchasers through power purchase agreements (PPAs). Additionally, it promotes the formation of renewable energy communities (RECs), empowering individuals and local groups to actively participate in the production, management and use of renewable energy. The ECS has confirmed that this legislation demonstrates Montenegro’s strong commitment to achieving its climate and energy targets (Energy Community, 2024[31]).
Financial support to the energy sector in Montenegro: EUR 88 million between 2018 and 2023
Montenegro’s energy sector received EUR 88 million in financial support between 2018 and 2023. Before the energy crisis (2018-20), financial support (both fiscal and credit support) amounted to approximately EUR 67 million. During the energy crisis (2021-23), it was about EUR 20 million (Figure 10.17). By volume, Montenegro’s total energy sector support in 2018-23 is the smallest in the region.
Period totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Fiscal support: Out of the total EUR 88 million in financial support to the energy sector in Montenegro, EUR 21.1 million was allocated as fiscal support, including direct transfers and tax expenditures. The largest portion (EUR 18.9 million) went towards supporting vulnerable consumers between 2018 and 2023. The major schemes include reduced electricity bills for two groups: those facing financial or health risks and those who are socially vulnerable, with the latter making up about 97% of the total support for vulnerable consumers. Recent schemes – known as Solari 3000+ and 500+, and Solari 5000+ – offer support for solar PV installations for households, businesses and public institutions. The support is financed and implemented jointly by EPCG and Ecofond (Table 10.1). Solari 3000+ and 500+ aim to install PV panels for 3 500 beneficiaries, with Solari 5000+ extending the programme to 5 000 more. The total estimated value of the Solari 3000+ and 500+ project is EUR 30 million, with Ecofond providing a 20% subsidy (up to EUR 6 million). As of 2024, EUR 1.35 million had been allocated to 950 beneficiaries.3 Solari 5000+ has an estimated value of EUR 70 million, with a 10% subsidy being provided (up to EUR 7 million). As funding for these schemes was allocated in 2024, the value is not included in the inventory covering 2018-23.
Three additional fiscal schemes in Montenegro are in the form of tax expenditures, including two value-added tax (VAT) reduction schemes and a debt reprogramming initiative for Pljevlja. The VAT reductions apply to the purchase and sale of pellets for heating (introduced in 2022), and to the sales, installation and import of solar panels (introduced in 2023). In both cases, VAT rates were reduced from the standard 21% to 7%. The calculated value of forgone tax revenue on pellet purchases was EUR 1.6 million for years 2022-23. Due to the lack of available data on total relevant investments in 2023, the forgone tax revenue for sales, installation and import of solar panels has not been estimated.
EUR million
Note: x stands for not applicable, .. stands for no data.
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Credit support: Between 2018 and 2023, the energy sector in Montenegro received credit support valued at EUR 67 million. This total includes one government loan and three publicly guaranteed loans from international financial institutions. The government loan, amounting to EUR 4.55 million, was part of an agreement between the Government of Montenegro and EPCG, using funds from the government’s agreement with the International Bank for Reconstruction and Development (IBRD) to finance remediation works at the Pljevlja site. In 2019, a EUR 33 million loan from Kreditanstalt für Wiederaufbau (KfW Development Bank) was approved for modernising the Perućica HPP (Phase II). Additionally, two publicly guaranteed loans were provided to CGES: EUR 20 million in 2018 through a KfW loan for electricity infrastructure on the Luštica Peninsula; and EUR 9 million in 2023 through an EBRD loan for installing a variable shunt reactor at the Lastva substation (Figure 10.18).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Understanding the distribution of support between fossil fuels and renewable energy in Montenegro
Taking into account Montenegro’s electricity mix, most of the induced support through regulated electricity prices goes to renewable energy. Over 2018-23, about EUR 715 million of this induced support was allocated to renewable energy and about EUR 446 million to fossil fuels (Figure 10.19 – Panel A).
All induced support through feed-in tariffs in Montenegro goes to renewable energy. When these guaranteed prices exceeded market values, the support effectively benefited producers. This occurred between 2018 and 2020, when feed-in tariffs provided approximately EUR 46 million in producer support. From 2021 to 2023, however, feed-in tariffs fell below market prices, resulting in an opportunity cost for producers of around EUR 100 million (Figure 10.19 – Panel B).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Most of financial support to the energy sector in Montenegro also goes to renewable energy. Over the period 2018-23, about EUR 63 million of financial support went to renewable energy, while only EUR 25 million went to fossil fuels (Figure 10.20).
2018-23 totals
Source: Authors’ elaboration based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Analysing the distributional impacts of energy subsidies and support measures
Energy prices in Montenegro are bound to increase in the medium term. The energy system of Montenegro relies largely on the use of coal and hydroelectric energy. In the past, this enabled the system to supply customers at low prices. As the economy advances along its decarbonisation path, prices will rise as they increasingly incorporate the externalities linked to fossil fuel use (in particular through carbon emissions) and as coal is replaced by renewable energy sources.
Distributional analysis can shed light on the efficiency of relatively low energy prices as a means to support households, compared with alternative policy instruments. Low energy prices have systematically generated a transfer of value from the energy system to consumers in Montenegro, with taxpayers ultimately bearing the charge. The distributional impacts of this implicit subsidy can be assessed using micro-simulation techniques, which also allow comparison of the impacts of low prices relative to key features of Montenegro’s social protection system – in particular that of targeted social assistance programmes.
This report relies on the Commitment to Equity (CEQ) framework to analyse the effectiveness of social protection tools in Montenegro. The CEQ framework (Chapter 5) provides a consistent methodological approach to analyse the impacts of taxation and public expenditure systems on income distribution. The method has been applied to economies around the World, across different levels of development. This allows international comparison of systemic distributional impacts as well as of individual programmes.
The baseline data for distributional analysis is the Survey on Income and Living Standards (SILC) 2020. SILC 2020 (which reports data for 2019) was selected to establish the baseline for analysis of distributional incidence, even though SILC 2021 data were also available at the time of writing. This is because the latter reflects data for 2020, during which the COVID-19 pandemic deeply affected the structure of household incomes (MONSTAT, 2020[32]). SILC includes detailed information on household income and its composition, which is used to establish the relevant income concepts for analysis. As SILC data do not include information on household consumption, it is complemented with household budget survey (HBS) data for 2017 (MONSTAT, 2017[33]). This makes it possible to include data on consumption expenditure (and, thus, indirect tax expenditure) and on energy consumption in the analysis.
The distributional impact of electricity price shifts in Montenegro
Electricity prices for households have been stable in Montenegro since 2019, despite increases and volatility of international energy prices. Network charges are regulated in Montenegro and fluctuate depending on wholesale prices, as network operators purchase electricity in the open market. Energy prices for households and small customers have been deregulated since 2017. However, EPCG, the single supplier in the market, faced a cap on annual price increases, of 7% in 2017 and 6% in 2018 and 2019. This was later extended until the end of 2022 (Government of Montenegro, 2020[21]). In practice, average prices increased significantly in 2018 (by 3.1%) and 2019 (by 2.6%) but have since remained stable. Notably, EPCG did not alter the energy portion of retail prices after 2019.
Keeping retail prices stable despite rising wholesale prices has shielded consumers from market movements. In turn, this generates a significant transfer of value from energy suppliers to consumers. Had retail prices followed the pace of wholesale and international prices, households in Montenegro would have faced much higher prices during the energy crisis of 2021-23. Indeed, the gap is estimated to be as high as 70% in 2023, which generated an implicit subsidy to electricity consumers. Analysis of this implicit subsidy can serve to study the distributional impacts of potential future price increases.
Distributional impact of a 70% increase in electricity prices
Note: This figure represents the simulated impact of a uniform 70% increase of electricity prices in Montenegro in both absolute and relative terms across the income distribution.
Source: Vladisavljević and Žarković (forthcoming[28]).
Implicit electricity subsidies in Montenegro transfer most value to better-off households while having a disproportionate effect of supporting the poor. Households in Montenegro use a combination of electricity and biomass (firewood and pellets) as energy sources, with wood having a prominent role in space heating. Since electricity consumption is strongly and positively related to income, a uniform shift in electricity prices impacts those at the top of the income distribution more in absolute terms. Indeed, the bottom 20% of the population (which corresponds roughly to the at-risk-of-poverty population) receives 12% of the implicit subsidy contained in electricity prices. The top two deciles receive 31%. For the poor, and particularly those in the bottom decile of the income distribution, electricity price increases constitute a significant shift relative to their disposable incomes. The impacts simulated do not account for any demand response to the shift in prices (Figure 10.21); as such, impacts of larger or smaller shifts in prices would be proportional to that shown.
Montenegro’s tax and transfer system is ill-equipped to redistribute income
Micro-simulation analysis can help determine how well tax and transfer systems can compensate for distributional impacts of potential policy changes. Comparing inequality (Gini coefficients) and absolute poverty headcounts before and after all taxes and transfers offers a measure of the ability of each economy to redistribute income. To this end, inequality and poverty are compared – before and after direct and indirect taxes and transfers – to analyse how overall tax and transfer systems influence redistribution (Figure 10.22 – Panel A) and poverty (Figure 10.22 – Panel B). Overall, the tax and transfer systems in the Western Balkans have modest redistributive effects: inequality (as measured by the Gini co-efficient) decreases by 0.01 points in Montenegro, similar to the impact in other Western Balkan economies (0.03 points in Albania; 0.02 points in North Macedonia; and 0.025 points in Serbia) (Figure 10.22– Panel A). In contrast, inequality falls by 0.12 in Spain and 0.06 in Poland when taxes and transfers are accounted for. In Montenegro, government interventions through taxes and transfers are associated with an increase in poverty. While direct taxes and transfers reduce extreme poverty in Montenegro (from 7.3% to 4.4% at the USD 3.20 per day poverty line), they increase poverty rates at the official poverty line (at 60% of median income). The large increase in poverty from tax and transfer systems is the result of indirect taxes, which have disproportionately larger impacts on poorer households. When all taxes and transfers are accounted for, their impacts are a sizeable increase in poverty – by 6.7 percentage points at the absolute poverty line and 12.5 at the relative poverty line. These results suggest that social transfers in Montenegro cannot offset the burden of taxes on poverty (Figure 10.22 – Panel B). This pattern is found in other Western Balkan economies and can also be observed in Türkiye and in other Central and Eastern European economies (e.g. Croatia, Poland and Romania), albeit to a lesser degree.
Gini coefficient based on market income and after direct and indirect transfers and taxes (Panel A), and absolute poverty headcount based on market income and after taxes and transfers (%) (Panel B)
Note: Data for the latest available CEQ assessment in each comparator economy: Colombia, Croatia and Poland (2014), Romania, Türkiye and the United States (2016), Argentina and Spain (2017). Data on Albania are for 2015. Data for Serbia and Montenegro are based on 2019 reference data. Data for North Macedonia are based on 2018 baseline data but simulate current social protection systems. Panel B. Poverty measured at the upper middle-income absolute poverty line (5.50 USD/day in 2011 PPP, 6.85 USD/day in 2017 PPP). Results for Albania are based on the upper middle-income absolute poverty line in 2005 PPP (4 USD/day). Results for Croatia and Poland correspond to the lower middle-income poverty line (2.5 USD/day in 2005 PPP.
Source: Data sourced from background papers prepared for this report: Montenegro data are from (Vladisavljević and Žarković, forthcoming[28]) Serbia data from (Vladisavljevic and Zarkovic, forthcoming[34]), North Macedonia from (Petreski, forthcoming[35]). Others sourced from CEQ (2024[36]) CEQ Standard indicators web version 5.0, CEQ Institute, https://commitmentoequity.org/datacenter/.
Montenegro relies on explicit electricity subsidies to support the vulnerable population. The Law on Energy (Government of Montenegro, 2020[21]) specifies the conditions to acquire the status of a vulnerable customer. It also stipulates that, alongside protection from disconnection, vulnerable customers are served at regulated prices and can receive a subsidy. The Decree on the supply of electricity to vulnerable customers (Government of Montenegro, 2018[37]) specifies that vulnerable customers are entitled to a subsidy of 50% of monthly electricity bills up to 600 kWh. Since 2007, the government has also implemented an electricity bill subsidy (EBS), for which the government sets conditions annually. As of 2023, the EBS subsidy amount depends on eligibility categories and covers either 40% of the electricity bill for bills up to EUR 60 (or a maximum of EUR 24) for some of them, or 30% of the bill for bills up to EUR 60 (or a maximum of EUR 18) for others (Government of Montenegro, 2024[38]). While the subsidy specified in the Decree has a maximum in terms of energy consumption and the EBS has a maximum in terms of total cost, they are roughly equivalent: 600 kWh of energy corresponds to a bill of EUR 63 (inclusive of VAT) for households with single-tariff metering.4 The EBS mobilised EUR 3.5 million as of 2023. In practice, very few customers are registered as vulnerable customers – 323 as of December 2023 (REGAGEN, 2024[13]). In contrast, 3 750 customers had received a 40% discount and 22 218 had received a 30% discount as of December 2023.
Explicit electricity subsidies in Montenegro are granted to households and individuals who benefit from a set of pre-determined social programmes. In the case of the EBS programme, benefits are granted to beneficiaries of the main means-tested social assistance programme (materijalnog obezbjeđenja [MO]), as well as several other categorial and means-tested programmes, including the care and assistance allowance (CAA); the personal disability allowance (PDA); family accommodation; veterans’ financial compensation; and, finally, to specific cases of unemployed persons. There is a notable gap in take-up of the EBS benefit, which currently covers only 60% of MO beneficiaries, 65% of CAA beneficiaries and 72% of PDA beneficiaries.
Electricity subsidies in Montenegro are not specifically targeted to the poor. The operationalisation of electricity subsidies based on eligibility for other social benefits implies that most electricity benefits are not means-tested. Only 13% of beneficiaries of electricity subsidies qualify through the MO, which is means-tested. In contrast, 10% of EBS beneficiaries are beneficiaries of PDA and 75% are beneficiaries of CAA. Notably, CAA is granted to persons who need care and assistance but are not beneficiaries of any disability allowance. Beneficiaries of these categorical benefits are not necessarily in financial need: for example, only 1.9% of PDA beneficiaries live in families entitled to MO, the average income of PDA beneficiaries’ families is EUR 595 per month (/mo) as of 2019, i.e. above the average wage (EUR 530/mo) for Montenegro (Raketić and Višnjić, 2021[39]).
Explicit electricity subsidies have very limited impacts on the income distribution of Montenegro. To assess their effects on inequality and poverty, the impacts and characteristics of subsidies are compared to that of social transfers. Data is not available for distributional analysis at the programme level. Two categories of explicit subsidies are chosen as programmes of interest: a) housing allowances, which include non-refundable assistance for housing or payment of rent and b) utility allowances, which include subsidies of utility bills received in the previous year (corresponding to the EBS programme). The subsidies are compared to two groups of social transfers: a) social assistance (which includes MO, one-off social assistance and other cash benefits) and b) child and family allowances (which include the child allowance and the allowance for mothers of more than three children).5 The impact of utility allowances on poverty is marginal: the programme is estimated to reduce poverty by 0.06 percentage points. It is slightly progressive, but less so than social assistance benefits, which are themselves not very progressive. Social assistance has a progressivity (Kakwani index) of 0.95 compared to 1.11 for the main means-tested programme in Serbia (Financial social assistance). Ultimately, the small impact on poverty in Montenegro mainly reflects the relatively modest size of the subsidy, which represents 0.04% of income on average and 2.2% for the poorest decile of the population. The limitations of data may also skew the results by not allowing programme-level analysis.
Relative size, poverty impact and progressivity of transfer programmes.
Note: Progressivity is measured by the Kakwani index. A negative index indicates a regressive transfer (i.e. more unequal than the pre-transfer distribution), a larger positive index indicates a transfer that is more concentrated among those with lower incomes.
The low measured impact of social assistance in Montenegro reflects the small size of last-resort income support but is magnified by data limitations. Montenegro’s social assistance system relies mainly on disability and care benefits, which are categorical rather than means-tested. Through recent reforms, the child benefit was expanded to all children under 18. In the reference year (2019) for micro-simulation data, only 22% of the social assistance budget (i.e. transfers not financed through social insurance) was devoted to means-tested programmes such as the MO. In practice, many beneficiaries of targeted programmes also receive several other benefits, which explains why – despite the limited use of targeting – social assistance and child and family benefits both appear as largely progressive.
Implicit electricity subsidies are slightly progressive but represent a costly means to distribute resources to those in need. For the implicit subsidy implied by below-market pricing of electricity for households, a price gap of 40% is taken as a benchmark. This represents 2.1% of market incomes of households (which spend, on average, 7.6% of disposable income on energy and 4.8% on electricity). Without this universal subsidy, the poverty rate in Montenegro would be 1.1 percentage points higher. In reality, much of this transfer goes to households at the top of the income distribution, making it an inefficient means to protect the poorest segments of the population.
Energy sector reform and the decarbonisation process in Montenegro require carefully balancing energy security, energy efficiency, and the economic and social consequences of reform. Until now, Montenegro’s energy sector has not relied significantly on subsidies to maintain a status quo of relatively low electricity prices (unlike some of its peers in the region). However, it is expected that decarbonisation, which entails a path to decommission the Pljevlja TPP and the introduction of wider carbon pricing, will push up electricity supply costs. In addition, market coupling will lead to convergence in wholesale prices, thus lowering price volatility in wholesale markets but putting pressure on prices to increase (REGAGEN, 2022[40]).
This section draws on micro-simulation and macro-economic modelling to examine policy scenarios for the energy sector in Montenegro, building on the inventory of energy subsidies and support measures presented in this chapter. The section starts with a description of the tools used and moves on to discuss reform scenarios, including the potential impacts of energy sector reform through changes in prices.
Analysing the macro-economic impact of potential energy sector reform
Changes in energy markets in Montenegro could impact the economy widely. At the macro-economic level, changes in the behaviour of market actors can alter the pass-through of international energy prices into domestic prices. This would produce a transfer of value from consumers to the energy sector and to the state, through three mechanisms: increased tax receipts on energy consumption; increased tax receipts linked to increased profitability; and dividend payments linked to improved performance of SOEs, particularly EPCG. The latter reflects that the income of the market operator, as well as the DSO and TSO, remain within the purview of regulation. Different sectors and firms will be differentially impacted, depending on the energy intensity of their activity and their ability to shift energy consumption between sources of energy.
This report puts forward the use of macro-economic computable general equilibrium (CGE) modelling as a flexible tool to analyse impacts in individual economies in the region (Chapter 4). This chapter relies on an instance of the POWER-CGE model developed for the case of Montenegro, the ME‑POWER‑CGE model. The ME-POWER-CGE model presents a simplified version of the economy of Montenegro and relies on a series of assumptions on the behaviour of actors. The model uses a 26-sector representation of the economy (at NACE section level). Given the price-setting behaviour of EPCG in the retail market in the recent past, the baseline model assumes that the electricity sector is a fixed-price sector that meets the posted demand of customers. The electricity supply sector is nonetheless modelled as two separate supply “grids” serving respectively households and non-household customers. This allows the analysis to simulate deviations in prices between the two types of customers. Different technologies for electricity production are modelled separately. The model is static, and the results are meant to represent new equilibrium situations after a policy or market shock has occurred.
To build a complete social accounting matrix for Montenegro, data for the ME-POWER-CGE model were compiled using multiple sources. The usual starting point for such a dataset is input-output tables for the economy. As these are not available for Montenegro, constructing the baseline dataset proceeded in two steps: first, gathering key flow variables from national and international sources, and then using these to calibrate the split of regionally aggregated data from available global input-output data. The dataset was built using the 2016 supply and use tables provided by the Statistical Office of Montenegro (MONSTAT). Key economic indicators – including employee compensation, sector-level value-added, gross fixed capital formation and tax revenues – were sourced from national accounts, also accessible via the MONSTAT (2024[41]) website. Import and export data, categorised by sector, were sourced from the UN Comtrade Database (2024[42]). In addition, the World Development Indicators (WDI) from the World Bank (2025[22]) provided data on net capital flows. Data from the International Monetary Fund (IMF, 2024[43]) were used for gross domestic savings and government deficit. For capital stock values, data was drawn from the Penn World Tables (2024[44]). All data were harmonised and transformed to 2022 values, expressed in euro (EUR). In parallel, all sectors were mapped and reconstructed to align with the NACE sectoral decomposition, ensuring compatibility across the model. These data were combined with the underlying database of the Global Trade Analysis Project (GTAP 11), which uses 2017 as the reference year (GTAP, 2023[45]). The GTAP database includes a global input-output matrix as well as social accounting matrixes for 160 regions. Since Montenegro is included as part of a regional aggregate in the GTAP database, the social accounting matrix was built based on the national data gathered. To fill remaining data needs, these data were then combined with the GTAP database to isolate Montenegro from the regional aggregates.
Reforming interventions on electricity pricing in Montenegro
State ownership of the single supplier has isolated electricity consumers from market movements
Retail electricity prices in Montenegro are largely deregulated. Energy prices were liberalised in 2017 and are set by EPCG. Until 2022, they were subject to a 6% limit on year-on-year increases. In practice, the energy component of prices was increased significantly in 2018 and 2019 (reaching the cap) and has since remained fixed in nominal terms. Energy costs made up 42% of retail electricity prices as of 2023 so retail prices increased less. The remainder of retail prices is made up of network costs (41% for households, 31% for non-households), taxes and levies. Network fees are fixed by regulation to meet the costs and mandated margins of regulated network operators.
To examine the impacts of price interventions, a series of market-consistent prices is calculated. These correspond to the situation in which electricity suppliers would procure electricity in the open market. As such, market-consistent prices include energy priced at international market prices (the annual HUPX average for day-ahead market prices is taken as the reference price) and network costs.6 As retail prices are not regulated in Montenegro, supplier operational costs and margins are not regulated. To allow for operational costs and margins, market-consistent prices are augmented by a regional reference margin (11.5%) that corresponds to the competitive margin for the universal service supplier (USS) supply implemented in North Macedonia, which is taken as the reference because it was set in a competitive auction process. Similar ratios are found for other economies in the region – e.g. 12.5% in Albania, including operational costs, financing costs and a regulated margin (Figure 10.24).
State ownership of the electricity supplier in Montenegro has kept prices low throughout turbulence in international electricity markets. Gaps between retail and market-consistent prices remained relatively low in 2018-20, averaging 0.2% for households before the inclusion of margins and 11.7% once operational costs and margins are allowed for. With retail energy prices remaining fixed from 2019 and network costs falling for household customers, retail prices in Montenegro did not reflect the significant increase in prices in 2021-23. As of 2023, household retail prices were 89% lower than market-consistent prices (including an allowance for operational costs and margin), while non-household prices were 77% lower.
Pricing policies in Montenegro induce a transfer from the energy sector to consumers. Following the buyback of shares from Italian investor A2A, EPCG is entirely controlled and almost entirely owned by Montenegro (which held 98.5% of shares as of 2023). While not determined by regulation, relatively low prices (particularly for households) are determined by the state through its ownership of EPCG. As such, they constitute a transfer of value from shareholders (i.e. Montenegrin taxpayers) towards electricity consumers (as detailed in the inventory presented in this chapter). During 2021-23, EPCG was a net seller in the electricity market; as such, low retail prices reflected a significant opportunity cost – as opposed to a financial cost.
Prices in Euro cents per kWh
Source: Calculations based on REGAGEN annual reports and Eurostat data.
Scenario 1: Market-consistent pricing
To examine the impact of maintaining low prices, this chapter relies on a series of scenarios in which retail prices are adjusted upwards towards market-consistent prices. The scenarios assume price increases for all final customers, while electricity sector prices are kept constant (as they are supposed to be market purchases). The simulation analyses impacts as retail prices are increased by 10%, 40% and up to 70% (denoted by Scenario 1a, 1b, etc.). The upper bound corresponds to a value close to the actual gap between retail and market-consistent prices as of 2023, reflecting what EPCG could charge before becoming uncompetitive vis-à-vis suppliers purchasing electricity in the market. Average prices for distribution customers were 88.2 EUR/MWh in 2023, while the market-consistent price was 145.2 EUR/MWh (considering only energy and network charges) and 161.8 EUR/MWh (if a 11.5% retail margin is also included). The gap was therefore between 65% (without margin) and 84% (including the margin).
Price adjustment scenarios rely on a modified version of the ME-POWER-CGE model. While electricity tariffs are deregulated in Montenegro, they have been kept largely constant since 2019, with changes related only to changes in network tariffs. For the simulations that follow, prices are kept constant for household and non-household customers, so that adjustment in demand is always done at constant price. In practice household and non-household sectors are modelled as price-taking grids that purchase electricity in the market to supply customers at the set price. The model therefore allows simulations to alter tariffs for households and firms separately.
Source: Authors’ calculations.
The simulation projects contractionary impacts linked to electricity price increases. Taking the 10% price increase as reference, electricity demand falls by about 5% (5.14% for households; 4.5% for firms). The impacts are also inflationary, with the consumer price index (CPI) increasing by 0.71%. Substitution towards other goods, including other energy sources, however, means that household consumption falls by significantly less (just under 1%). Overall, a 10% increase in electricity prices leads to a relatively mild contraction of 0.16% of GDP. This is due, in part, to an increase in tax revenues from the energy sector – total tax revenues increase by 0.76%.
Price increases also have impacts on the composition of output. An associated fall in output is particularly pronounced in extractive sectors and noticeable in manufacturing (-1.2%). In contrast, electricity shows gains from the price increase: despite a fall in demand, given the relatively low elasticity of demand, total output increases significantly (by 4.3%). In addition, increased public expenditure results in benefits for several sectors (e.g. construction, public administration and public services), which moderates the contraction.
Increased prices allow for greater income in the energy sector of Montenegro. Income for electricity suppliers grows directly, through increased prices for demand by final consumers. It also grows indirectly as demand from final customers falls, which means electricity surplus can be sold in the open market. Assuming that total electricity output remains constant and that any surplus is sold in the open market (at HUPX prices), the income increases are substantial (Table 10.2). Across the scenarios, as compared against 2023 financial results, the electricity supplier (EPCG) shows increases in net income ranging from 5% to 27%, which correspond to increases in net profits (before tax) of 37% to 204%. These increases are driven to a greater extent by the indirect channel, that is from sales of surplus electricity at international prices; in fact, for smaller price increases, net gains from the indirect channel are significantly larger than from the direct channel.
Reforms that narrow the gap between household and firm prices contribute to mitigating the negative impacts of the price increase. Scenarios 1d and 1g present the impact of increases in prices that correspond to bringing average retail prices to market consistent levels as they were prior to the energy crisis (1d) and as they were as of 2023. Scenario 1d corresponds to an increase in average prices to 95.4 EUR/MWh (or a 8.1% increase) and Scenario 1g corresponds to an increase in average prices to 162 EUR/MWh. This is an admittedly high bound that corresponds to the situation where electricity would have been purchased at HUPX day ahead prices (106.8 EUR/MWh on average in 2023). In each case, an alternative scenario applies the gaps that exist between average prices and market-consistent prices for households and non-household consumers respectively. Market-consistent prices for households are higher because the incorporate network charges at low voltage only, while retail prices for non-household customers incorporate a weighted average of (lower) network charges for non-household customers, which also include customers served at higher voltage levels. Since, in practice, household tariffs are lower than non-household tariffs, this convergence results in households bearing a larger share of the burden. In that situation represented by Scenarios 1e and 1h for respectively the lower and upper bounds, the negative effects are diminished, and in Scenario 1e, the overall impact on output is positive (0.26%). The lower bound price convergence scenario (Scenario 1e) implies a small reduction in tariffs for non-household customers, which contributes significantly to the positive economic impact. An alternative scenario where non-household prices are left unchanged (Scenario 1f) still generates positive economic impacts.
Source: Authors’ calculations.
Simulations suggest that income to the energy sector can compensate for increased expenditures to help the poor. Not surprisingly, only a fraction of projected increased income to electricity suppliers would be needed to compensate those at risk of poverty (19.5% of households in the micro-simulation). While the simulations account for tax revenues from increased profits, dividends are not included, as they are not automatically generated. In practice, additional income generated in the energy sector is significantly larger than compensation needed. At the lower end of the simulated price changes, a 10% price increase would generate up to EUR 24 million (largely in EPCG earnings), while compensating those at risk of poverty would require transfers worth EUR 1.6 million. Additional earnings are also significantly larger than output lost (0.16% would correspond to EUR 11.1 million in 2023) (Table 10.2). This indicates scope to design appropriate mechanisms to compensate both households in need and the economy by mobilising a fraction of additional revenues.
Compensating the poor or the energy-poor would require a significant increase in cash benefits. To analyse the options to compensate those in need, a simulation was carried out to expand the size of cash transfer programmes in Montenegro. Compensating those at risk of poverty requires a relatively small increase in cash benefits (Table 10.3) as part of existing cash benefits are means-tested and targeted to the income-poor. In contrast, as not all households at risk of energy poverty are income-poor, compensating this larger group would require a larger increase in cash benefit programmes. Indeed, an energy-specific shift in how such transfers are targeted and granted may offer avenues for cost-savings in the process of generating mitigating interventions.
Scenario 2: removing cross-subsidies in retail pricing
Cross-subsidies in the energy sector are relatively small in Montenegro but favour households and small consumers. To simulate the removal of cross-subsidies, the model accounts only for differences between comparable customers. A price comparison between households and non-households served at the same voltage (0.4 kV) shows that energy tariffs are 5.6% lower for households and small customers than for non-household customers. In turn, these gaps are translated into the shifts in total electricity prices needed to make prices for both categories converge to their current average. To simulate the removal of cross-subsidies, the model is shocked with an increase in household prices by 1% and a reduction in non-household prices by 1.3%. Given EPCG pricing schedules for businesses compared to households, it should be noted that the simulation assumes prices for all non-household customers fall by the same amount. However, the simulation does not account for the gamut of tariff schedules (including block tariffs and green tariffs) available to households.
Changes relative to baseline
Source: Authors’ calculations.
The ME-POWER-CGE model predicts a small expansionary impact from rebalancing prices. The simulated change in prices leads to a 0.04% increase in GDP, driven by the fall in costs of the productive sector. The simulation is designed to be revenue-neutral from the point of view of the supplier. However, as the elasticity of corporate demand for electricity is typically higher than that of households, differential impacts on demand from households and firms can drive electricity consumption up in this case.
The macro-economic impacts of direct transfers to the energy sector and to consumers are relatively small
Direct subsidies to energy consumption and production in Montenegro are relatively small and thus have modest macro-economic impacts. To gauge the impacts of direct transfers, two different direct transfers are simulated. First, the support granted to Pljevlja coal mine through the reprogramming of its debt is modelled as a direct transfer (EUR 0.67 million) to the coal mining sector. Second, the electricity bill subsidy programme is modelled in two versions: one corresponding to the annual budget of the programme (EUR 3.5 million) and one of larger magnitude comparable to the response to the energy crisis (EUR 11.8 million, including EUR 8.3 million of support allocated by the Ministry of Labour and Social Welfare for 2023, in the context of the EU Energy Support Package).
The direct transfer to Pljevlja has a small impact to support coal. The CGE estimates suggest that this transfer increases production of electricity from coal by 0.21%, supporting a slight increase in total electricity supply. If prices are kept fixed, this has a small expansionary impact on energy-intensive sectors (e.g. extractive sectors and manufacturing). It leads, however, to a reduction in public spending that has a contractionary effect. The net impact depends on the size of the fiscal multiplier; in the baseline model, the net impact is a small contraction by 0.006% of GDP.
Source: Calculations based on the Inventory of Energy Subsidies and Support Measures in the Western Balkans.
Direct transfers to households support consumption. Direct transfers to households (e.g. subsidies for electricity purchase) support an increase in electricity consumption by 0.05% (in the case of the annual average transfer) and an increase in total household consumption of 0.10%, as only a share of the increase in disposable income is spent on electricity. The associated derived demand has an expansionary impact on goods-producing sectors. In contrast, it has a small contractionary impact on sectors that depend on public expenditure (e.g. education, health and public administration). The overall impact is slightly negative on total output in part due to a reduction of government demand.
Increasing the cost of electricity production from coal in Montenegro
The cost of electricity generated from coal is increasing and will increase further. Montenegro introduced an ETS in 2020, although it began to auction permits only in 2023, generating EUR 9.3 million. The mechanism has been undermined by the fact that it originally had only three active participants, which were reduced to only the Pljevlja power plant after the economy’s aluminium and steel plants ceased operations. As a consequence, when auctions began in 2023 for 64% of the total allocation of permits, they were traded at the minimum statutory price of EUR 24 per tonne of carbon dioxide (/tCO2). As accession talks and energy integration progresses, it is expected that the price of carbon in Montenegro will converge towards the EU price (which averaged EUR 83.20/tCO2 in 2023, then dropped to EUR 64.74/tCO2 in 2024).
The impacts of the increase in the cost of coal-produced electricity will depend on the behaviour of the electricity market. The macro-economic model simulates the impacts of an ad valorem production tax on the production of electricity from coal, using two different configurations of the model. The baseline model keeps prices fixed, irrespective of cost or changes in international wholesale markets. In the alternative model, the electricity market allows the additional cost to pass through to retail prices, as the market adjusts supply and demand. The size of the tax chosen is arbitrary but corresponds to a value of the charge of 66.7 EUR/MWh before market adjustment, based on the average income per unit of electricity supplied by EPCG. The emissions factor for TPPs in Montenegro was 1.04 tCO2eq/MWh7 as of 2021, which would amount to a charge of 86.6 EUR/MWh at 2023 EU ETS permit prices (Table 10.4).
Simulated impact of a 66% tax on electricity production from coal
Source: Authors’ calculations.
In the absence of a market response, a sizeable charge on electricity production from coal would be borne entirely by the production sector. This would lead to a minor contraction in the electricity market, but a significant contraction (37%) in production of electricity from coal, substituted by other technologies and by imports. Even before factoring in the additional cost of imported electricity, the cost to the electricity sector is sizeable, just under EUR 30 million. While large, this remains below the net result (EUR 54.3 million) of EPCG in 2023. The small economic impact of this measure (0.33% increase in GDP) stems from the use of proceeds to expand public expenditure.
In a freely operating market, any increased cost of coal-produced electricity would have a notable contractionary impact. In the open-market version of the model, the cost pass-through is high, which leads to a much larger contraction (23%) in electricity supply. Notably, the model does not assume perfect pass-through; rather, only a fraction of the tax is passed on to the price of electricity from coal. However, additional demand from other sources increases their market prices, which adds to the increased price of electricity in equilibrium. The increase in the price of electricity and a decline in activity levels of the energy sector drive sizeable contractions in the economy (0.92%) and in household consumption (2.5%).
In the adjusting market configuration, revenues can be mobilised to compensate households. As in the case of Scenario 1, in this configuration, Scenario 2 shows the passthrough of the production tax has the effect of significantly increasing energy supplier revenues, despite the fall in demand. As the model does not include capacity constraints, it may underestimate the impacts of procuring additional sources of electricity. Despite the fall in aggregate electricity demand, total income for electricity suppliers increases (these are modelled as one firm per technology). As in Scenario 1, a fraction of this income would suffice to compensate those at risk of poverty.
Reducing the carbon intensity of its energy sector is a key priority for Montenegro. Montenegro has set ambitious goals for climate action, with a 55% emissions reduction target by 2030 (compared with 1990 levels). Such objectives will require significant expansion of capacity through investments in new renewable energy sources. Despite a liberalised domestic retail market, competition has not emerged, which limits prospects for investment to serve the domestic market. Ensuring prices incorporate the full costs of production and supply, including externalities, can create commercial opportunities and encourage investment. Increasing carbon prices will however, lead to significant price shifts whose social and economic implications need to be managed.
This section presents key policy recommendations for Montenegro. The chapter draws on the analysis presented in previous sections, and on the results of broad-based consultations in Montenegro. The results of a Peer-Learning Workshop held in Podgorica in December 2024 are also presented an inform the policy orientations provided. As part of this workshop, participants developed specific priority policy actions, which are highlighted in the relevant thematic areas and presented in Box 10.3.
A peer-learning process was an integral part of the Just Transition in the Western Balkans project, complementing the data collection and analytical work underpinning this report. As part of this process, a series of workshops were organised with three overarching aims: a) identify key issues for a more inclusive and financially sustainable development of the energy sector at the regional and economy level; b) put forward suggestions for future policy actions at the economy level; and c) foster exchange of policy experiences. The process brought together key stakeholders from the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia) in the field of energy transition.
The workshop “From Analysis to Action: Scenarios for Inclusive Energy Sector Finance Reform” took place in Podgorica on 17 December 2024. It was attended by 27 experts representing various societal perspectives, including government, civil society, academia and business in Montenegro. Participants included the following: the Cabinet of the Prime Minister; the Office for Sustainable Development; the Ministry of Energy; the Ministry of Agriculture, Forestry and Water Management; and the Energy and Water Regulatory Agency of Montenegro as well as representatives from the Municipality of Pljevlja. Also present were representatives from: the Electricity Market Operator of Montenegro (Crnogorski operator tržišta električne energije d.o.o., [COTEE]); the Montenegrin Electricity Distribution System (Crnogorski elektrodistributivni sistem, [CEDIS]); the electric power transmission system (Crnogorski elektroprenosni sistem AD [CGES]); the national energy company (Elektroprivreda Crne Gore AD Nikšić [EPCG]). Other participants represented: the Chamber of Economy of Montenegro; the Business Women’s Association of Montenegro; the Confederation of Trade Unions of Montenegro; and the coal mine Pljevlja. Experts and representatives from academia and civil society participated within the areas of energy transition, gender equality, energy poverty and environmental protection.
The workshop began with a presentation of the preliminary findings of this project, followed by a presentation of national strategies and plans governing the energy sector in Montenegro. It subsequently transitioned into a economy-level plenary session during which participants identified and prioritised the most pressing issues for fostering a more inclusive and financially sustainable energy sector in Montenegro. These issues were grouped into key themes, which the participants ranked based on urgency and importance. For the most prioritised themes, concrete policy actions were developed, with a strong focus on their implementation within Montenegro’s political context related to production and investment, socio-economic issues and policy and implementation (Table 10.8).
Source: OECD Peer-Learning Workshop in Montenegro on 17 December 2024.
Align electricity prices with market rates to ensure they accurately reflect production and supply costs
Providing electricity at below-market prices resulted in approximately EUR 1.16 billion in induced support to consumers in Montenegro in 2018-23. Aligning domestic electricity prices with market prices, particularly for households, establishes a crucial foundation for the green transition while also enhancing competitiveness. Market pricing is key to ensure security of supply, as it ensures that prices are sufficient to cover relevant costs for producers, suppliers and network operators. Higher electricity prices can also generate higher revenue for energy enterprises, providing essential funds for future investments. Prices that more accurately reflect market dynamics would, for example, support the financing of essential investments in network infrastructure and energy production. This shift could also create opportunities to reduce prices for industrial consumers, thereby creating incentives for new investments.
Gradually raise prices while safeguarding vulnerable groups
Montenegro should develop a clear strategy and concrete timeline for gradually increasing electricity prices to achieve cost-reflectiveness. OECD analysis shows that electricity prices in Montenegro have not always been cost-reflective. To address this, Montenegro should begin by thoroughly assessing available data to determine the actual costs of electricity production and identify gaps between current and cost-reflective prices. In turn, it should set a strategy that outlines specific actions to bridge this gap, with a realistic timeframe to reach cost-reflective pricing. The Peer-Learning Workshop participants suggested a five-year time frame (Box 10.3, Policy Action 1).
Enhancing corporate governance of SOEs in the energy sector is key for successful price reform. Price regulation has been gradually phased out in Montenegro. In 2022, a restriction on price increases was also phased out. However, political considerations have prevented prices from increasing despite the fact that they are freely formed. In turn, this prevents the emergence of competition in retail electricity markets in Montenegro.
Once strategies and actions plans are set, effective implementation will be become vital. Successful implementation of energy tariff reforms requires a comprehensive approach that balances public awareness, government capacity-building and social protection. First, public awareness programmes should be conducted to explain how tariffs fund energy infrastructure and why price adjustments are necessary, aiming to foster greater transparency and public support. It is critically important to enhance the government’s ability to communicate tariff increases effectively, using clear and accessible messaging to build public trust and mitigate resistance. Simultaneously, government institutions must strengthen their capacity to set cost-reflective tariffs, ensuring that pricing aligns with production costs while maintaining financial sustainability. Lastly, dedicated programmes should be developed to protect vulnerable populations from the financial impacts of rising energy costs, ensuring that reforms are both economically sound and socially inclusive (Box 10.3).
Addressing energy poverty and the protection of vulnerable customers in Montenegro
Supporting energy-poor households during the energy transition is crucial to ensuring that the shift toward cleaner, more sustainable energy systems is fair, inclusive and socially just. Data on subjective indicators collected by SILC reveal that between 14% and 30% of households in Montenegro experience energy poverty. This is reflected in their inability to keep homes adequately warm, being in arrears on utility bills, or living in housing that prevents appropriate energy efficiency.
Improve support for vulnerable households and the way it is targeted
Electricity subsidies in Montenegro are not specifically targeted to the poor. As the operationalisation of electricity subsidies is based on eligibility for other social benefits, it implies that most electricity benefits are not means-tested. In addition, subsidies are granted as a percentage of energy costs with a cap on the total subsidy, which corresponds to a cap on the total amount of electricity subsidised. In most cases, these subsidies are “topping up” existing categorical benefits; as such, increasing said benefits may make it easier for customers to be exposed to price signals.
The protection of vulnerable households could be broadened and streamlined. Multiple schemes in Montenegro provide financial support linked to energy, with diverse qualifying criteria and degrees of generosity. The scheme designed to protect vulnerable customers, as defined in the Energy Law, is particularly restrictive as it requires both health and financial hardship. Such households are recognised as vulnerable and receive protection from disconnection. However, they also face higher prices (as charged by the supplier) than other households. Very few households (323 as of December 2023) are covered on these grounds. In contrast, households can receive financial support through the subsidy bill programme of the Ministry of Finance and Social Welfare, which covers significantly more households (more than 20 000).
Providing non-financial support to the energy-poor, such through targeted energy efficiency incentives and/or promotion and support of renewable energy communities
Other, non-targeted mechanisms can be used to support the energy-poor. Montenegro could strengthen incentives for energy efficiency and target them towards the energy-poor. Energy efficiency improvements help reduce energy consumption, leading to lower energy bills and a more sustainable energy system.
Continue fostering upgrades to Montenegro’s grid to ensure further deployment of renewable energy
Montenegro has set an ambitious goal of achieving a 50% share of energy from renewable sources in its gross energy consumption by 2030. In August 2024, Montenegro adopted its first Law on the Use of Energy from Renewable Sources, which paves the way for accelerated growth in renewables. The introduction of an auction system designed to support renewable energy projects is a key feature of the new energy law, with the first auctions scheduled for 2025. This system is expected to attract new investments and enhance the integration of renewables into Montenegro’s energy grid. The law also includes the issuance of guarantees of origin, which will facilitate long-term power purchase agreements (PPAs) between renewable energy providers and consumers, further stimulating sector growth. Additionally, support for the concept of renewable energy communities (RECs) empowers individuals and local groups to participate in the production, management and consumption of renewable energy, promoting decentralisation and local engagement (Energy Community, 2024[31]).
Enhancing Montenegro’s grid is essential to support the growth of renewable energy and ensure stable and efficient power supply. This will require implementation of a strategic process. First, the gradual integration of new power plants into the grid should be guided by updated spatial planning laws and relevant documentation. The grid must also be capable of accommodating all planned prosumers, enabling individuals and businesses to generate and feed electricity into the system. To optimise grid operations, the TSO (CGES) and the DSO (CEDIS) should continue improving management practices, including digitalisation and automation, which will enhance efficiency and reliability while reducing the workload on employees. Strengthening human resource management within CGES and CEDIS is vital to ensure a skilled workforce capable of maintaining and upgrading the grid infrastructure. In parallel, developing energy storage solutions (e.g. battery systems) will help balance supply and demand, increasing grid resilience. This should be supported by the creation of a legislative environment that encourages investment in both energy storage and renewable energy projects. Finally, to encourage commitment and minimise disruptions to operations and grid planning, accountability should be ensured by introducing penalties for investors that fail to follow through with their projects (Box 10.3, Policy Action 2).
Supporting the transformation of Pljevlja in energy transition
The future of the Pljevlja coal-fired TPP will play a pivotal role in shaping Montenegro’s decarbonisation strategy. As the Pljevlja TPP currently generates over 40% of Montenegro’s electricity, its potential closure is likely to have substantial impacts on energy supply and significant social implications for the local community. The coal mine is the largest employer in the municipality, providing more than 1 100 jobs, while the power plant adds another 158 positions. Together, they account for approximately 20% of all employment in the municipality.
Creating new opportunities by promoting entrepreneurship and skills development
Generating new opportunities in the Pljevlja region is essential to stimulate economic growth, prevent population outflow and reduce poverty. To boost entrepreneurship and support SMEs, Montenegro could develop dedicated incentives schemes and offer offices. To ensure the local workforce can meet industry demands, retraining programmes should be established to help workers transition to industries (e.g. cement, brick, styrofoam and gypsum manufacturing) requiring similar skills (Box 10.3, Policy Action 3).
Support effective implementation of the Just Transition Roadmap for Montenegro, which focuses on Pljevlja
Effective implementation of Montenegro’s Just Transition Roadmap requires a comprehensive action plan with clearly defined measures, timelines and funding sources. It should be formally adopted by the government to ensure accountability and commitment. A well-structured institutional framework should be established for the roadmap, assigning specific roles, setting deadlines and allotting responsibilities to relevant stakeholders. To oversee progress, a dedicated Just Transition Council should be formed, meeting monthly to monitor implementation, address challenges and ensure alignment with long-term goals. Additionally, organising site visits to other coal regions undergoing transition can provide valuable insights and best practices, supporting the development of tailored solutions for Montenegro. To secure sustainable funding, revenues from the ETS and other environmental fees should be earmarked exclusively for projects and initiatives that drive economic diversification and social support in the Pljevlja region (Box 10.3, Policy Action 4).
The closure and decommissioning of coal mines in Poland have led to significant socio-economic challenges. Workers in the mining sector tend to have similar education levels to those in manufacturing and construction. However, they receive substantially higher wages, benefits and special privileges, such as early retirement. They also hold a high social status in their communities and often serve as the primary earners for their families, making mine closures particularly impactful.
Poland’s experience highlights the importance of establishing compensation and re-skilling programmes to prevent unemployment and other social issues, while also demonstrating the risks of relying solely on financial compensation. Between 1998 and 2002, a coal labour restructuring programme provided early retirement for approximately 37 000 miners in Poland, with 30 000 receiving a one-time, unconditional severance payment equal to 24 months’ salary (known as the “golden handshake”). This approach largely failed, however, leaving many miners unemployed and inactive. Many spent their lump-sum payments on large purchases, such as cars, but later struggled to find new jobs. In contrast, a smaller group of 419 miners chose monthly redundancy payments for two years, combined with retraining and job placement assistance. Overall, this group achieved better long-term employment outcomes.
Learning from this, Poland introduced new initiatives in 2018, aiming to create alternative employment opportunities for former miners. Examples include thermal retrofitting of buildings and installation of small-scale PV solar projects.
Source: OECD (2022), Multi-dimensional Review of the Western Balkans: From Analysis to Action, OECD Development Pathways.
Promote social equity and expand opportunities by enhancing gender inclusion
Focusing on gender in the energy transition is essential for promoting social equity and creating new opportunities. From an economic standpoint, greater gender diversity leads to increased productivity, creativity and profitability. By empowering women to participate in energy-related fields – such as engineering, technology and management – societies can address labour shortages and foster a broader talent pool. Additionally, energy transition initiatives often involve community engagement and household-level decisions, where women play key roles. Ensuring their involvement in policy design and implementation leads to more effective and socially accepted outcomes. Gender equality is one of the key pillars of the Just Transition Roadmap and can also play an important role in the transformation of Plevlja.
This requires integrating a gender perspective into all aspects of the transition process to allow for more inclusive policies that address the specific needs of both women and men. To support evidence-based decision making, it is crucial to improve gender statistics and analysis, including the collection and analysis of sex-disaggregated data by MONSTAT and other official statistics producers. Enhanced methodologies should capture the roles of women as consumers, producers and prosumers, ensuring that policy decisions are informed by valid and comprehensive data. Conducting in-depth gender analyses can help identify barriers and opportunities unique to women, facilitating their greater participation in energy production and consumption. Additionally, designing gender-sensitive subsidies will support women entrepreneurs, producers and prosumers, fostering their economic empowerment and contributing to a more inclusive energy transition (Box 10.3, Policy Action 5).
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← 1. Due to a lack of more exact data, for 2018-21, fixed annual tariffs of 45 EUR/MWh were assumed for the KAP aluminium smelter (EPCG, 2021[30]).
← 2. Reference prices used for the supply of electricity to Uniprom for KAP aluminium smelter, to non-household consumers at various voltage levels (35, 10, and 0.4 kV), and to household consumers (0.4 kV) are HUPX prices (plus network costs and 11.5% of margin, which allows to account for operation costs, depreciation and a profit margin). For the supply of electricity to the DSO CEDIS for grid losses reference market prices that REGAGEN publishes for year 2023 were used.
← 3. Information obtained from the Environmental Protection Fund of Montenegro (Ecofond).
← 4. The cost of a given amount of electricity consumption depends on the time of use and the tariff model chosen by consumers. As such, it can vary significantly. Consumption of 600 kWh of peak-time electricity corresponds to a cost of EUR 62.87 in the “blue” tariff model for single-tariff metering (EPCG, 2024[46]).
← 5. The allowance for mothers of more than three children was abolished in 2017, then restored in 2022. It was therefore not active in the reference year for the data (World Bank and UNICEF, 2022[48]).
← 6. Network costs in Montenegro are set by a schedule of prices that depend on time of day (peak and non-peak) as well as the type of connection of customers. Annual averages are obtained from Eurostat (2024[47]). Eurostat data do not distinguish transmission and distribution customers in the case of non-household customers. Average non-household network costs are therefore an underestimation of average network costs for distribution customers.
← 7. The emissions factor is calculated by combining emissions data from the National Inventory Reports (NIR) of Montenegro (Environmental Protection Agency of Montenegro, 2023[49]) and detailed energy balances from MONSTAT (MONSTAT, 2024[4]).