Montenegro has sanctioned a €40 million borrowing package for Elektroprivreda Crne Gore (EPCG), the state-owned utility, highlighting the critical role of energy infrastructure in addressing the nation’s power system challenges and worsening external imbalances. This financing, arranged through Germany’s development bank KfW, is intended to support the long-awaited expansion of the Perućica hydropower plant, which includes adding a new generating unit aimed at increasing total capacity to approximately 365 MW.
This investment comes at a time when Montenegro’s economy, heavily dependent on imports, tourism revenues, and fluctuating electricity exports, is under significant strain. The country’s total goods trade has surpassed €5 billion, yet exports are only about €570 million, with imports reaching around €4.46 billion, resulting in a substantial deficit exceeding €3.5 billion. Electricity exports, which previously provided some financial relief, are no longer effective in mitigating this imbalance.
The situation has been exacerbated by the EU’s Carbon Border Adjustment Mechanism, which has negatively impacted EPCG’s competitiveness in EU markets. The utility reported a loss of €13 million in the first quarter of 2026, as carbon pricing begins to significantly influence electricity export prices. Even during periods of strong generation, realized prices are increasingly adjusted to account for anticipated carbon costs.
In this context, the expansion of Perućica assumes greater importance. The project is primarily focused on enhancing domestic supply stability, rather than boosting export capabilities. As Montenegro’s main low-carbon resource, additional hydropower capacity will provide flexibility and reduce reliance on imports during times of low generation or outages at thermal facilities.
The financial arrangement further underscores this dual objective. In addition to the €40 million investment loan, the government has also approved a separate €30 million refinancing deal, enabling EPCG to restructure short-term liabilities accumulated throughout 2025 due to necessary electricity imports during outages at the Pljevlja coal plant and adverse hydrological conditions.
Together, these initiatives reflect a strategy focused on capacity expansion and balance sheet stabilization. The concessional terms of the KfW loan—spanning over a decade with a multi-year grace period—align with European development goals concerning decarbonization and energy resilience.
This alignment is crucial as Montenegro’s energy sector faces multiple structural challenges: carbon pricing pressures, hydrological variability, and an increasing dependence on imports that contribute directly to the trade deficit. Expanding hydropower capacity serves as one of the limited options available to simultaneously address these issues.
The economic ramifications are closely tied to the energy sector itself. Montenegro’s growth model relies heavily on tourism and services that generate foreign currency but also increase demand for imported goods and infrastructure. This dynamic has led to a persistent trade account imbalance that is becoming more pronounced as export capacity struggles to grow.
The valuation of infrastructure reflects these shifts; coastal assets linked to tourism are commanding higher prices, while sectors associated with domestic production and energy exports are facing tighter margins and increased risk. The energy system is particularly affected by diminishing prospects for carbon-intensive exports and an enhanced focus on internal stability.
The Perućica expansion is viewed as a targeted intervention rather than a transformative measure. At €40 million, it does not fundamentally change Montenegro’s energy mix but enhances system reliability during a time when flexibility and self-sufficiency are becoming more critical than export potential.
The timing of this project is also noteworthy; the new unit is anticipated to be operational by around 2027, coinciding with when costs associated with CBAM will start impacting electricity trade flows significantly. By that time, reducing import dependency while ensuring stable domestic supply may hold more financial significance than marginal export income.
The approval of EPCG’s borrowing thus represents more than just routine infrastructure investment; it illustrates an evolving landscape where energy policy, external balances, and capital allocation are increasingly interconnected. Montenegro’s ability to manage its trade deficit while navigating carbon pricing challenges will increasingly hinge on its effectiveness in securing and optimizing its domestic energy resources.
