The Western Balkan economies are committed to transitioning towards a greener and healthier energy mix, with the aim of reducing air pollution and greenhouse gas emissions. A cleaner environment and better air quality, especially in major urban centres, is a top desire of citizens. Phasing‑out of coal would dramatically reduce air pollution and carbon dioxide emissions. In parallel, expanding solar and wind energy, while also boosting energy efficiency, could make energy systems much greener and create new economic opportunities both in and beyond the sector. The region’s economies have made bold commitments towards emissions reduction and climate neutrality. The Energy Community Treaty, EU Green Deal, and Nationally Determined Contributions (NDCs) set key frameworks for climate neutrality and act as important drivers for future reforms. The investment targets set the by region’s National Energy and Climate Plans (NECP) range from EUR 4 billion in Kosovo to EUR 27 billion in Serbia.
Reforming energy subsidies and price regulation can help make energy systems in the economies of the Western Balkans more resilient and sustainable. The current practice of providing electricity to both households and firms at artificially low prices leads to large fiscal burdens and inefficiencies in these economies. Using the Inventory of Energy Subsidies and Support Measures in the Western Balkans, this report finds that governments have directed EUR 5.8 billion of financial support to electricity producers and consumers between 2018 and 2023. Over the same period, the provision of low-cost electricity through a combination of price regulation and state ownership policies has transferred the equivalent of EUR 19.1 billion to energy consumers compared to what the same volume of electricity would have cost in spot markets. If current policies were continued, this report estimates that between 2025 and 2030, these governments would disburse about EUR 4.2 billion in financial support and generate EUR 14 billion worth of benefits through energy consumption – even in a conservative scenario without major price spikes like the ones observed in 2021-22. Strategic reforms could deliver the three-fold advantage of freeing up these resources for investing in the energy transition; protecting government budgets from the risk of having to rescue their energy sectors during times of crisis; and allowing for more competition and new private investments in energy markets. More cost-reflective energy pricing will also be important if the economies of the region introduce carbon pricing in the context of the EU’s Carbon Border Adjustment Mechanism (CBAM).
Energy market reforms must be accompanied by actions to protect vulnerable households in the region: shifting from price interventions to more targeted social protection measures would be a much more cost-efficient alternative. Evidence indicates that a large proportion of the Western Balkan population is at risk of energy poverty. It also shows that, because current systems of maintaining low electricity prices to prevent energy poverty are applied broadly, they distribute substantial value to households that do not need the support. On average across the region, the richest 20% of households receive 26% of such support, while the poorest 20% receive 14%. Aside from being inefficient and costly, this blunts price signals that would encourage energy savings and energy efficiency investments. Protecting vulnerable households, even as prices increase, could be better achieved through more targeted support, either by expanding existing social protection provisions or developing new programmes that specifically target energy poverty. Across various reform scenarios, a relatively low share (14% on average across the region) of the energy sector windfalls from price increases would suffice to protect the 20% to 30% of the population most in need.
To address these issues and create the conditions for a successful and sustainable energy transition, Western Balkan economies need to implement comprehensive reforms covering several key areas:
Pursue gradual transition to market-determined energy prices, starting with large business customers. To support such transitions, this report examines modelled scenarios specific to each economy. Across scenarios, increasing energy prices for firms harms competitiveness in more energy-intensive sectors. However, rebalancing energy prices for households is expansionary and, in most cases, compensates the macroeconomic impact of increases in production costs.
Phase out direct fiscal subsidies to fossil fuels and fossil-fuelled electricity production, which could free up to EUR 510 million annually for complementary social spending and investments in the energy transition.
Strengthen corporate governance in state-owned enterprises in the energy sector and resolve their debt issues.
Enhance social protection systems by replacing universal subsidies with targeted assistance for vulnerable populations.
Executing a just energy transition in the Western Balkans also requires the following complementary policy interventions, as developed and elaborated through Peer-Learning Workshops held in the context of this project, involving a broad range of stakeholders within or linked to the energy sector:
Support renewable energy and energy efficiency with adapted regulatory frameworks, particularly for certification and metering, as well as investments in network infrastructure to enable the grid to integrate higher shares of intermittent and distributed production, and programmes for upgrading the energy performance of residential buildings.
Ensure effective stakeholder engagement, particularly in coal regions undergoing transition. Social dialogue should include national and local governments, energy companies, trade unions, and civil society to build public support and consensus for reforms. Knowledge-sharing platforms should be established to facilitate best practice exchange and learning across the region.
Establish financing mechanisms that are accessible to all segments of society, including low-interest loan programmes, targeted subsidies for vulnerable groups and tax incentives for energy-efficient investments.
Tailor programmes targeting energy poverty and promoting energy efficiency to the specific needs and roles of distinct vulnerable groups, including women and men, the elderly, single parents and households using other energy sources. Focus groups conducted for this report highlight the potential of user-centric perspectives.
Build gender considerations into all energy transition policy and programming. The energy transition and the expansion of renewable energy provide opportunities for greater female participation in the energy sector workforce.