The reordering of ownership in South-East Europe’s oil sector has had an effect far beyond fuels and refineries. By forcing oil pricing onto transparent, market-based terms, it has removed a long-standing buffer that masked deeper distortions elsewhere in the energy system. Nowhere is this more evident than in electricity generation based on coal and lignite. What had long been presented as a pillar of cheap, sovereign energy has been exposed as a system sustained by implicit subsidies, deferred capital expenditure and balance-sheet erosion rather than by genuine economic competitiveness.
Across South-East Europe, coal and lignite remain structurally dominant. Serbia, Bosnia and Herzegovina and North Macedonia together still generate between 45% and 60% of their electricity from lignite-fired power plants. In Serbia alone, lignite typically accounts for around 60% of annual electricity production in hydrologically normal years, with the remainder split between hydropower, limited gas and growing but still secondary renewables. These plants underpin baseload supply, employment and social stability. Yet their apparent affordability is increasingly illusory.
The inherited lignite model
The coal and lignite systems of South-East Europe were designed under a fundamentally different economic logic. Mines, power plants and grids were built as integrated state systems whose primary objectives were employment, energy independence and price stability rather than capital efficiency or return on investment. Fuel appeared cheap because it was domestic, labour costs were administratively controlled and environmental externalities were ignored.
Most lignite plants in the region are now 35–45 years old, far beyond their original design lives. Their capital cost was written off decades ago, which has reinforced the perception that they generate electricity at marginal costs of only €20–25/MWh. On paper, this still looks competitive when compared with imported electricity or gas-fired generation during periods of high fuel prices.
However, this accounting view ignores three critical realities: the rising cost of keeping ageing assets operational, the gradual internalisation of environmental constraints and the fiscal consequences of state ownership in a market-integrating region.
Oil repricing as a catalyst
As long as oil and gas were supplied under politically mediated conditions, electricity systems benefited indirectly. Energy price shocks were absorbed upstream or cross-subsidised across the energy chain. Once oil pricing shifted decisively to market terms following the exit of Russian ownership, this protective layer disappeared. Higher fuel prices across the economy forced governments, regulators and utilities to confront the true financial position of electricity producers.
Coal and lignite did not suddenly become more expensive in a technical sense. What changed was visibility. Maintenance backlogs, declining mine productivity and the looming cost of environmental compliance could no longer be deferred without threatening system reliability. The result has been a slow but unmistakable recognition that coal’s affordability rests on postponement rather than efficiency.
Maintenance and life-extension capex
The most immediate pressure comes from maintenance and life-extension capital expenditure. Ageing lignite plants require rising levels of investment simply to remain operational. Turbines, boilers, ash handling systems and cooling infrastructure are approaching technical limits. Supplier bases have shrunk, spare parts are increasingly custom-made and outages are more frequent.
Across Serbia and Bosnia and Herzegovina, annual maintenance and sustaining CAPEX has increased by 35–50% over the past five years. What once required roughly €200–300 million per year across major lignite fleets now demands €350–450 million just to preserve availability. These expenditures do not modernise plants or improve efficiency; they merely delay failure.
Mining operations face similar dynamics. Lignite seams are deeper, stripping ratios are higher and calorific values are declining. In some Serbian basins, effective mining costs per unit of energy have nearly doubled over the past decade. This erosion of fuel quality directly increases the cost of electricity generation, even before environmental factors are considered.
The shadow price of carbon
Even without full participation in carbon markets, lignite generation in South-East Europe carries a substantial shadow carbon cost. When benchmarked against prevailing EU carbon prices and projected border adjustment mechanisms, lignite-based electricity faces an implied cost penalty of €40–70/MWh by the late 2020s.
This cost is not yet fully monetised, but it already shapes behaviour. Banks price it into financing conditions, neighbouring markets reflect it in cross-border trade, and industrial consumers factor it into long-term sourcing decisions. As regional electricity markets integrate more closely with the EU, lignite-based power increasingly trades at a discount or is excluded during periods of surplus.
Once even partial carbon pricing or emissions fees are introduced, the economic case for lignite collapses rapidly. At €50/MWh of carbon-equivalent cost, lignite loses any residual advantage over imported electricity or gas-fired generation in most scenarios.
Implicit subsidies quantified
Because coal and lignite systems remain largely state-owned, their losses rarely appear as explicit subsidies. Instead, they are embedded in utility balance sheets, deferred maintenance, state guarantees and foregone dividends. When these elements are aggregated, the scale of implicit support becomes clear.
In coal-heavy electricity systems, the hidden fiscal burden associated with lignite generation amounts to 1.5–2.2% of GDP annually. This includes capital injections to cover losses, government-backed borrowing to finance maintenance, delayed environmental investments and the opportunity cost of underpriced electricity sold to households and industry.
In Serbia, the state electricity utility operates as both an energy provider and a social instrument. Electricity tariffs remain politically sensitive, limiting the ability to pass rising costs through to consumers. The result is chronic underinvestment and periodic emergency funding, which transfers energy-system risk directly onto the public balance sheet.
Cross-border competition and market integration
As South-East Europe integrates more tightly into regional electricity markets, lignite’s weaknesses become more pronounced. During periods of low renewable output elsewhere, lignite plants still provide indispensable baseload. But during normal or high renewable generation, imported electricity from hydro-rich neighbours or more efficient gas-based systems increasingly undercuts domestic coal generation.
This dynamic erodes export revenues and forces utilities into defensive postures. Capacity payments, export restrictions and regulatory protections become tools to preserve domestic generation. Each measure adds complexity and fiscal exposure while delaying structural adjustment.
The result is a system that is technically indispensable but economically fragile.
Coal versus gas: A false dichotomy
Public debate often frames the choice as coal versus gas. In reality, both fuels face structural constraints. Gas is import-dependent and volatile; coal is capital-intensive and environmentally constrained. The crucial difference lies in transparency. Gas costs are explicit and immediately reflected in prices. Coal costs are implicit, deferred and socialised.
Once oil repricing removed one layer of opacity from the energy system, coal emerged as the next stress point. Its costs have always existed; they were simply hidden by institutional arrangements that are no longer sustainable.
Outlook to 2030
By 2030, lignite will almost certainly remain part of the South-East European electricity mix, but on increasingly precarious terms. Without major investment, plant availability will deteriorate and outage risks will rise. With investment, costs will escalate sharply.
Keeping existing lignite capacity operational through the end of the decade is likely to require cumulative CAPEX of €3–4 billion across the region, largely for life-extension rather than modernisation. Even with this spending, effective generation costs are expected to converge toward €60–80/MWh, excluding any explicit carbon charges.
At the same time, financing conditions will tighten. As environmental criteria become embedded in lending and state aid rules, the cost of capital for coal-related assets will rise, further undermining their economics.
Winners and losers
The immediate beneficiaries of this transition are electricity traders and neighbouring systems able to export during periods of lignite stress. Renewable generators also gain indirectly as coal’s implicit subsidy erodes and price formation becomes more transparent.
The principal losers are state utilities and taxpayers. What once appeared as cheap domestic electricity is revealed as a gradual drain on public resources, crowding out investment in grids, renewables and storage.
Coal as the next adjustment shock
The change in oil ownership did not create the lignite problem; it exposed it. By forcing transparency in one part of the energy system, it removed the political space to ignore distortions elsewhere. Coal and lignite, long protected by legacy structures and social narratives, now face an unavoidable reckoning.
South-East Europe does not confront an immediate coal exit. It confronts a choice between managing the hidden subsidy openly or allowing it to accumulate invisibly until it becomes fiscally and technically unmanageable. In this sense, lignite represents the next major adjustment shock in the region’s post-Russian energy landscape.