Montenegro’s hydropower fleet should, in principle, give the country a significant low-carbon trading advantage. Reservoir flexibility allows generation to be shifted towards higher-value hours, hydropower plants have very low direct operational emissions, and the Adriatic interconnector provides access to the Italian electricity market. However, the first quarter of 2026 demonstrated that these advantages do not automatically translate into higher export revenues under the EU’s Carbon Border Adjustment Mechanism (CBAM).
Energy Community monitoring identified a broad surplus of low-cost electricity across the Western Balkans during the first quarter, supported by favourable hydrological conditions. Day-ahead prices in Energy Community Contracting Parties averaged more than EUR 30/MWh below those in neighbouring EU markets. Nevertheless, commercial electricity exchanges across EU borders declined by approximately 25%. Montenegro provided a particularly striking example: the apparent export price spread with southern Italy was around EUR 43/MWh, while the default-based CBAM charge used in the Secretariat’s analysis reached approximately EUR 73.78/MWh.
The underlying problem is the difference between a national emissions factor and the actual emissions profile of an individual generating plant. Under the default-value approach, imported electricity does not automatically inherit the emissions characteristics of the technology from which a trader claims it originated. Montenegro’s default factor of 0.979 tCO₂e/MWh reflects the fossil-based methodology applicable to the exporting electricity system. Consequently, a hydro-dominated export programme can face a carbon cost that appears disconnected from the direct emissions of the individual hydropower station.
The actual-emissions route is intended to address this discrepancy, but qualifying for it is not automatic. Hydropower operators must maintain installation-specific boundaries, reliable metering data, a qualifying physical power purchase agreement (PPA), evidence of the relevant transmission route and nominations, and allocation records linked to the authorised CBAM declarant. Generation from a portfolio of hydropower plants cannot simply be averaged across a utility’s fleet when an emissions claim relates to a specific installation.
This distinction also changes the commercial calculation for reservoir hydropower. Traditionally, operators compare the expected future value of stored water with the electricity price available today, while accounting for hydrology, environmental flows, generating-unit limits and system requirements. Export planning now introduces another consideration: whether the targeted delivery hour can be supported by the evidence required for the intended carbon treatment.
A high electricity price in Italy does not necessarily represent the best export opportunity if the necessary cross-border records are unavailable or replacement electricity must be purchased when the plant generates less than expected. Conversely, a lower-priced delivery hour may produce a stronger netback if the plant-specific volume can be properly documented and the risk of falling back to default emissions values is limited. The relevant measure becomes the realised margin per eligible imported megawatt-hour, rather than generation revenue alone.
Dry-year conditions introduce further complications. During periods of weak hydrology, Montenegro may experience lower hydropower output, higher replacement-power costs and a greater reliance on imports or thermal generation. If an export PPA requires a firm delivery profile, a trader may need to purchase replacement electricity that cannot be attributed to the original hydropower installation. Under these circumstances, a project can lose both commodity margin and evidence-dependent value within the same stress scenario.
Montenegro’s main hydropower assets should therefore not be treated as a single, standardised commercial product. Reservoir characteristics, operating restrictions, connection points, metering boundaries and dispatch flexibility differ between facilities such as Perućica and Piva. Future investments, including potential additional capacity at Perućica, should be assessed not only for incremental electricity generation but also for their contribution to operational flexibility, data quality and the ability to support specific electricity-trading arrangements.
Pumped-storage projects require additional scrutiny. Shifting electricity through storage can provide substantial system flexibility and arbitrage value, but electricity discharged later is not automatically treated under current CBAM rules as renewable generation produced during the original charging hour. Charging origin, conversion losses, auxiliary consumption and the timing of charging and discharge must be assessed through appropriate accounting procedures and legal analysis.
The European Commission’s proposed CBAM reform could have particularly important implications for Montenegro. The proposal would replace the current fossil-oriented default approach with an average-grid emissions factor and remove the congestion criterion for actual-emissions claims. For a country with substantial hydropower generation and expanding wind and solar capacity, these changes could improve the competitiveness of electricity exports under the default-value approach if adopted. However, the proposed changes must be modelled as a future scenario, not treated as rules already in force.
Montenegro’s hydropower advantage is therefore real, but its commercial value depends on several factors working together. Water availability, dispatch decisions, transmission access and emissions evidence must all be considered when evaluating export opportunities. The first-quarter market paradox was not that Montenegro’s hydropower had suddenly become carbon-intensive, but that a low-carbon physical surplus could not fully access a higher-priced EU market because the applicable methodology valued the exporting electricity system differently from the individual renewable installation.
The opportunity is to address this gap before the next period of abundant hydrological conditions. A reservoir can store water, but it cannot recover a missed nomination, an invalid PPA or an unverified electricity allocation after delivery has taken place. For Montenegro’s hydropower operators, evidence management is becoming as important to export optimisation as the timing of generation itself.
By Virtu.Energy