For more than a decade, the integration of Southeast Europe’s electricity markets into the European Union framework has been guided by a clear trajectory: gradual convergence of prices, strengthening of cross-border trade, and alignment of regulatory frameworks. The Western Balkans, through the Energy Community, have been positioned as the next layer of the EU’s internal energy market—connected physically through interconnectors and increasingly aligned through market rules and coupling mechanisms. The introduction of the Carbon Border Adjustment Mechanism in 2026 has not halted this trajectory, but it has introduced a structural friction that raises a central question: is the region experiencing a temporary adjustment phase, or a more fundamental slowdown in market integration?
The first quarter of 2026 offers early evidence of both dynamics. On one hand, physical interconnection remains intact. Transmission capacity between the Western Balkans and neighbouring EU member states continues to be available and heavily allocated, with utilisation rates often exceeding 95%. The infrastructure that underpins integration has not changed. Electricity still flows across borders, and the grid remains interconnected. On the other hand, the economic and regulatory environment governing those flows has shifted in ways that undermine the traditional drivers of integration.
Price convergence, one of the clearest indicators of market integration, has weakened significantly. Historically, day-ahead prices across Southeast Europe exhibited strong correlation, often exceeding 0.80–0.90, reflecting the efficient arbitrage of price differentials. In Q1 2026, this relationship broke down. Prices in the Western Balkans diverged from EU benchmarks by more than €30/MWh, compared to €5–15/MWh in 2025. While part of this divergence can be attributed to exceptional hydrological conditions, the persistence of wide spreads despite available transmission capacity suggests a deeper structural shift.
The role of CBAM in this divergence is central. By imposing a carbon cost on electricity imports into the EU, CBAM effectively creates a barrier to price convergence. Even when electricity can be produced more cheaply in the Western Balkans, the addition of carbon costs—ranging from €70 to €86/MWh for coal-intensive systems—reduces or eliminates the economic incentive to export. This disrupts the arbitrage mechanism that normally drives price alignment, allowing price differentials to persist over time.
The impact on cross-border trade is equally significant. Commercial exchanges between the Western Balkans and the EU declined by approximately 25% in Q1 2026 compared to the same period in 2025. The reduction was particularly pronounced in flows from the EU into the Western Balkans, which fell by −40.7%. This contraction reflects a combination of factors, including reduced arbitrage opportunities, regulatory uncertainty, and changes in generation patterns. The net effect is a decrease in the volume of electricity traded across the EU–WB6 border, signalling a slowdown in one of the key channels of market integration.
At the same time, the pattern of trade has shifted. Intra-regional exchanges within the Western Balkans have increased, while certain CBAM-free corridors—particularly those involving low-carbon systems such as Albania—have gained prominence. This reconfiguration suggests that integration is not simply declining but being reshaped. Instead of a unified regional market with strong EU linkages, the system is evolving into a more segmented structure, with clusters of markets connected by both physical and regulatory considerations.
This segmentation has implications for the broader objectives of the Energy Community. The alignment of the Western Balkans with EU energy and climate policies has been a central goal, aimed at facilitating eventual integration into the internal energy market. CBAM, while aligned with EU climate objectives, introduces a divergence in market conditions that complicates this process. Markets that can align with low-carbon generation profiles are effectively drawn closer to the EU, while those reliant on coal face increasing barriers to participation.
The asymmetry created by CBAM is particularly evident in the treatment of different generation systems. Hydro-dominated markets such as Albania benefit from a zero emission factor, allowing them to export electricity into the EU without incurring additional costs. Coal-heavy systems, by contrast, face significant carbon charges that reduce their competitiveness. This differential treatment creates a tiered integration structure, where some markets are effectively integrated while others are partially excluded.
From a regulatory perspective, this raises questions about the coherence of integration policy. The EU’s internal energy market is based on principles of non-discrimination and efficient allocation of resources. CBAM introduces a form of discrimination based on carbon intensity, which, while justified from a climate perspective, can conflict with the objectives of market integration. Balancing these objectives requires careful calibration of policy instruments to ensure that decarbonisation does not come at the expense of integration.
The role of uncertainty is another critical factor. The implementation of CBAM in the electricity sector is still evolving, and market participants face uncertainty regarding key aspects such as the treatment of transit flows, the methodology for calculating emission factors, and the future trajectory of carbon prices. This uncertainty has led to more cautious trading behaviour, particularly in forward markets, where participants are reluctant to commit to long-term positions in the absence of clear regulatory signals. The decline in forward capacity auction prices—by 24–67% on key corridors—reflects this shift in expectations.
This cautious behaviour further contributes to the slowdown in integration. Forward markets play a crucial role in aligning expectations and facilitating long-term investment. When these markets weaken, the ability of participants to hedge risks and plan for the future is reduced, leading to lower levels of cross-border engagement. Over time, this can erode the institutional and commercial links that underpin integration.
The interaction between CBAM and the EU Emissions Trading System adds another layer of complexity. Because CBAM costs are linked to EU ETS prices, fluctuations in the carbon market directly affect the economics of cross-border trade. In Q1 2026, the decline in carbon prices introduced volatility into CBAM costs, influencing trading decisions and adding to the uncertainty faced by market participants. This linkage effectively imports carbon market volatility into the electricity sector, further complicating the integration process.
Despite these challenges, it is important to recognise that integration is not a binary outcome. The physical and institutional foundations of the EU–Western Balkans electricity market remain in place. Interconnectors continue to operate, and market coupling initiatives are ongoing. The observed slowdown in Q1 2026 may represent a transitional phase as markets adjust to the new regulatory environment. Over time, adaptation by market participants, combined with regulatory refinements, could restore some degree of integration.
One potential pathway for maintaining integration is the alignment of carbon pricing mechanisms across the region. If the Western Balkans were to adopt carbon pricing frameworks compatible with the EU ETS, the asymmetry introduced by CBAM could be reduced. This would allow price signals to reflect carbon costs more consistently across borders, facilitating arbitrage and supporting convergence. However, such alignment requires significant policy coordination and may face economic and political challenges.
Another avenue is the refinement of CBAM implementation. Adjustments that allow for more accurate representation of actual generation emissions, rather than relying solely on default emission factors, could reduce distortions and improve the efficiency of cross-border trade. Similarly, clearer rules for the treatment of transit flows could restore confidence in the use of Western Balkan corridors for intra-EU trade, supporting both integration and system efficiency.
The evolution of generation portfolios in the region will also play a decisive role. As renewable capacity increases and the share of low-carbon generation grows, the competitive position of Western Balkan markets could improve under CBAM. This would facilitate greater participation in cross-border trade and support the re-establishment of integration dynamics. However, the pace of this transition will depend on investment conditions, regulatory frameworks, and access to financing.
The first quarter of 2026 highlights a critical inflection point in the integration of Southeast Europe’s electricity markets. The introduction of CBAM has introduced a structural friction that slows the traditional drivers of convergence, while also creating new pathways for differentiation and adaptation. Whether this represents a temporary disruption or a longer-term redefinition of integration will depend on how effectively markets and policymakers respond to the challenges and opportunities presented by the new framework.
What is clear is that integration can no longer be understood solely in terms of physical connectivity and market rules. It must also account for the alignment of carbon economics and the regulatory environment that governs cross-border trade. In this broader context, CBAM is both a constraint and a catalyst—slowing integration in some areas while encouraging transformation in others. The balance between these forces will determine the future shape of Southeast Europe’s electricity markets and their relationship with the European Union.