South East Europe’s electricity market is often discussed through coal, gas and solar. But in parts of the region, the most important variable is still water.
Hydropower is central to the Western Balkan electricity balance. Albania is the clearest example: its electricity system is overwhelmingly hydro-based, while Bosnia and Herzegovina, Montenegro, Serbia and North Macedonia also rely on hydro to varying degrees. Bruegel research notes that Western Balkan electricity generation is significantly reliant on hydropower, with Albania producing close to all of its electricity from hydro.
Hydro gives the region important advantages. It can provide low-carbon electricity, flexibility, storage and fast ramping. In wet years, hydro-heavy systems can export electricity and reduce regional prices. In dry years, the same systems can become import-dependent and contribute to price stress.
That makes hydrology one of the most important market risks in South East Europe.
The 2025 drought conditions offered a reminder. AP reported that a severe drought and heatwave affected the Western Balkans, reducing hydropower output in Albania and forcing the government to spend around €60 million on energy imports.
This is the hydro paradox. Hydro is flexible, but water inflows are not controllable. Reservoirs can shift energy across hours, days or seasons, but only if there is water to store. During prolonged drought, hydro loses both energy and flexibility value.
Climate volatility makes this issue more important. Hot, dry summers can increase electricity demand through air conditioning while reducing hydro availability. That is a dangerous combination. At the same time, solar output may be strong during heatwaves, but solar does not cover evening demand unless paired with storage or demand shifting.
Hydro also interacts with cross-border trade. Albania may be an exporter in wet periods and an importer in dry periods. Montenegro and Bosnia and Herzegovina can also swing with hydrological conditions. These shifts affect neighboring markets because South East Europe is a connected regional system. A dry Balkan hydro season can increase imports from EU markets, raise prices and intensify competition for cross-border capacity.
For traders, hydro forecasting is therefore essential. Rainfall, snowpack, reservoir levels, river flows and seasonal temperature outlooks can be as important as fuel prices. A market model that ignores hydrology will miss major balance swings.
For renewable developers, hydro can be a complement. Solar and hydro often fit well together. Solar produces during the day, allowing hydro reservoirs to conserve water for evening or peak periods. In theory, hydro can act as a natural battery for solar-heavy systems. But that strategy depends on reservoir management, market rules and water availability.
For policymakers, hydro risk argues for diversification. A hydro-heavy system may be low-carbon, but it is not automatically secure. Albania’s experience shows that dependence on one weather-sensitive source can create import risk. Solar, wind, storage, interconnectors and demand response can reduce that exposure.
For investors, hydro modernization may be an overlooked opportunity. Existing hydro assets can often be upgraded with better turbines, digital controls, improved reservoir management and environmental safeguards. Pumped hydro may also play a role where geography and permitting allow.
But hydro development must be handled carefully. New projects can face environmental, biodiversity and social concerns, especially on sensitive river systems. The region needs better hydro flexibility, but not at any ecological cost.
The broader lesson is simple: South East Europe’s power market is not only a fuel market. It is a weather market. Sun, heat, rainfall, snow and wind increasingly determine prices.
Hydro will remain one of the region’s strategic assets. But it should be treated as a flexible resource with weather risk, not as guaranteed firm supply. The countries that manage that risk well will have a major advantage in the next phase of the electricity transition.
Elevated by virtu.energy