Montenegro has approved a €40 million borrowing package for its state utility Elektroprivreda Crne Gore (EPCG), underscoring how energy infrastructure is becoming central to the country’s effort to stabilise both its power system and its widening external imbalance.
The financing, arranged with Germany’s development bank KfW, will fund the long-planned expansion of the Perućica hydropower plant, including the installation of a new generating unit that will lift total capacity toward 365 MW. While modest in absolute terms, the investment arrives at a moment when Montenegro’s economic model—heavily reliant on imports, tourism revenues and volatile electricity exports—is facing growing strain.
The decision reflects a broader recalibration of priorities. Montenegro’s total goods trade has now exceeded €5 billion, yet exports remain weak at around €570 million, while imports have climbed to approximately €4.46 billion, leaving a deficit above €3.5 billion. Electricity, once a partial offset through opportunistic exports, is no longer providing the same cushion.
That shift has been accelerated by the introduction of the EU’s Carbon Border Adjustment Mechanism. EPCG has already recorded a €13 million loss in the first quarter of 2026, as carbon pricing begins to erode the competitiveness of electricity exports into EU markets. Even when generation is strong, realised prices are increasingly discounted to reflect future carbon costs.
Against this backdrop, the Perućica expansion takes on a different significance. It is less about increasing export capacity than about reinforcing domestic supply stability. Hydropower remains Montenegro’s primary low-carbon resource, and additional capacity provides both flexibility and a hedge against import dependence during periods of weak generation or outages at thermal plants.
The financial structure of the deal reinforces this dual objective. Alongside the €40 million investment loan, the government has also endorsed a separate €30 million refinancing arrangement, allowing EPCG to restructure short-term liabilities accumulated during 2025. Those liabilities were driven largely by electricity imports required during outages at the Pljevlja coal plant and unfavourable hydrological conditions.
Together, the two facilities point to a combined strategy of capacity expansion and balance sheet stabilisation. The concessional terms of the KfW loan—spanning more than a decade with a multi-year grace period—reflect the project’s alignment with European development priorities, particularly in the context of decarbonisation and energy system resilience.
This alignment is increasingly important. Montenegro’s energy sector sits at the intersection of several structural pressures: carbon pricing, hydrological volatility, and a growing dependence on imports that feeds directly into the trade deficit. Expanding hydropower capacity offers one of the few available levers to address all three simultaneously.
The broader economic implications are difficult to separate from the energy system itself. Montenegro’s growth model is anchored in tourism and services, sectors that generate foreign exchange but also drive demand for imported goods and infrastructure. This dynamic has contributed to a persistent imbalance in the trade account, one that is becoming more pronounced as export capacity fails to scale.
Infrastructure valuations are already reflecting this shift. Coastal, tourism-linked assets are attracting premium pricing, while sectors tied to domestic production and energy exports face tighter margins and higher risk. The energy system, in particular, is being reshaped by the declining viability of carbon-intensive exports and the rising importance of internal stability.
In this context, the Perućica project represents a targeted intervention rather than a transformative one. At €40 million, it does not alter the structural composition of Montenegro’s energy mix. However, it improves the reliability of the system at a time when flexibility and self-sufficiency are becoming more valuable than export optionality.
The timing is also significant. The new unit is expected to come online around 2027, coinciding with the period when CBAM-related costs will begin to be fully reflected in electricity trade flows. By then, the ability to reduce import exposure and maintain a stable domestic supply could carry greater financial weight than marginal export revenues.
Montenegro’s approval of EPCG’s borrowing therefore signals more than routine infrastructure investment. It reflects an emerging reality in which energy policy, external balances and capital allocation are increasingly intertwined. The country’s ability to manage its trade deficit, navigate carbon pricing pressures and sustain growth will depend, to a growing extent, on how effectively it can secure and optimise its domestic energy base.
