Serbia Faces Rising Energy and Investment Costs as Expo 2027 Approaches

Serbia is expected to maintain adequate electricity, fuel and gas supplies through the remainder of 2026, but the financial cost of securing those supplies is becoming a central economic concern. An exceptionally hot and dry summer has reduced regional river levels, weakened hydropower output and disrupted fuel transport along the Danube. At the same time, geopolitical instability, higher oil prices and uncertainty surrounding Naftna Industrija Srbije (NIS) and its Pančevo refinery are increasing pressure on the country’s energy system.

The immediate threat is therefore not a broad physical shortage of electricity. Serbia can purchase power on regional markets and increase thermal generation when hydropower production falls. The problem is the significantly higher cost of replacement electricity when drought conditions affect Serbia and neighbouring interconnected markets simultaneously.

Energy security is consequently becoming a financial issue for Elektroprivreda Srbije (EPS), the state budget, industrial companies and households. Imported electricity purchased during regional shortages can cost several times more than baseload production from Serbia’s largely depreciated lignite fleet, weakening EPS cash flow and increasing pressure for regulated tariff adjustments.

Energy costs add pressure to Serbia’s growth outlook

The energy challenge comes alongside several structural constraints: weaker foreign investment, shortages of qualified workers, limited domestic corporate ownership and the need to preserve household demand. Higher electricity and fuel costs increase operating expenses for companies, reduce household purchasing power and raise the cost of public infrastructure projects. Labour shortages add to construction costs, while weaker private investment leaves the government carrying a greater share of economic expansion.

Serbia entered the period with significant macroeconomic buffers. Gross foreign-exchange reserves reached approximately €30.5 billion at the end of July 2026, while net reserves were close to €26 billion. Inflation stood at 2.7% in June, within the National Bank of Serbia’s target range of 3%, plus or minus 1.5 percentage points. The banking system remains liquid and well capitalised, while public debt is moderate compared with much of Europe. These conditions provide protection against a temporary disruption but do not eliminate exposure from an ageing electricity system, rising domestic consumption and increasingly volatile regional energy markets.

The International Monetary Fund expects Serbian GDP to grow by about 2.8% in 2026, following approximately 2% growth in 2025. The National Bank of Serbia’s spring forecast was somewhat higher at around 3%, with growth projected to accelerate to 4–4.5% in 2027 as construction and visitor spending connected with Expo 2027 reach their peak. The current growth projections represent a significant reduction from earlier expectations that Serbia would quickly return to growth above 4%. The weaker outlook reflects external uncertainty, domestic political tensions, lower foreign investment and a less favourable energy environment.

Industry faces electricity and carbon-cost pressures

Higher energy costs could weaken growth through several channels. Electricity and fuel imports increase the trade deficit, while higher transport and production expenses reduce corporate margins. Increases in regulated energy prices can reduce household disposable income.

Energy-intensive exporters also face additional pressure from the European Union’s Carbon Border Adjustment Mechanism (CBAM), which introduces direct carbon-related liabilities for selected products entering the EU market. The issue is particularly important for Serbia’s copper, steel, fertiliser, cement and other processing industries. Their competitiveness increasingly depends not only on the nominal price of electricity but also on its carbon intensity and the quality of documentation surrounding the electricity consumed.

Lignite-based generation may remain physically available, but embedded emissions can become increasingly relevant to EU-facing supply chains through purchasing agreements, financing arrangements and verification requirements. Serbia consequently has two separate electricity-system requirements: maintaining sufficient generation during periods of peak demand and providing cleaner, traceable electricity for industrial exporters. Increasing coal production or relying on emergency imports addresses the first requirement but not the second.

Solar and wind capacity can reduce marginal electricity imports, but intermittent generation alone cannot provide the required system stability. Serbia needs a combination of renewable generation, flexible hydropower, battery storage, stronger transmission infrastructure, demand-response mechanisms and reliable balancing capacity.

Pumped storage and batteries form part of the system expansion

The proposed Bistrica pumped-storage hydropower project, generally discussed at approximately 600–700 MW, could provide a major balancing resource for Serbia’s electricity system.

Đerdap 3, considered in several configurations and potentially at a substantially larger scale, represents a longer-term option. Both projects require development work, environmental assessments, financing preparation, grid studies and procurement before construction. Their main system value would not necessarily come from continuous low-cost generation. Pumped-storage facilities can move electricity from lower-price periods into higher-price hours, provide reserves and reduce exposure to extreme wholesale prices.

Battery storage can be deployed more rapidly, although Serbia would need a substantial portfolio rather than individual demonstration facilities. Depending on technology, connection requirements and storage duration, utility-scale batteries generally require approximately €350,000–€650,000 per MW for shorter-duration systems. Four-hour configurations would require materially greater investment. A national battery portfolio of 500–1,000 MW would consequently require several hundred million euros of capital.

Wind generation has a different system profile from solar. Serbian wind farms can achieve capacity factors of approximately 30–40% at stronger sites and often produce electricity during evening, winter and shoulder-season periods when photovoltaic output is limited.

Transmission capacity becomes a limiting factor

Grid availability has emerged as a critical constraint. New high-voltage transmission lines, substations, transformers and protection systems typically require three to five years even when route planning, land acquisition and financing are relatively advanced. Serbia therefore cannot address its electricity requirements solely by approving additional generation projects.

The 400kV, 220kV and 110kV transmission networks, together with medium-voltage distribution infrastructure, require reinforcement to reduce congestion and connect renewable generation, storage facilities and new industrial demand. Grid investment needs to precede generation development rather than follow connection requests after projects have already received permits.

NIS remains central to Serbia’s oil-security position

The country’s second major energy vulnerability is oil. The ownership and sanctions situation surrounding NIS affects refinery operations, crude procurement, banking relationships, insurance, fuel transportation and aviation-fuel availability. Maintaining operations at the Pančevo refinery remains strategically important because domestic refining gives Serbia greater control over fuel supply than relying entirely on imported diesel, petrol and aviation fuel. Changes to NIS’s Russian ownership could reduce sanctions exposure. Serbia’s concern extends beyond the identity of a future shareholder to the continued operation of the refinery, access to crude, working-capital financing and sufficient state influence over strategic decisions.

The summer’s low Danube levels have also demonstrated that an ownership restructuring alone cannot eliminate physical supply risks. During July, river transport capacity in parts of Serbia, Hungary and Romania was operating at only 30–40% of normal levels, sharply reducing fuel-import volumes. Serbia has strategic reserves and access through the JANAF pipeline, but its supply system remains dependent on a relatively limited number of logistical routes.

Fiscal policy faces competing demands

The next pressure point is domestic demand. Household consumption remains an important contributor to economic activity, supported by wage and pension increases and a relatively stable dinar. Maintaining consumption can limit the severity of an economic slowdown, but using public-sector wages and pensions as a permanent growth mechanism carries fiscal and inflation risks.

Under its IMF policy framework, Serbia is committed to keeping the general-government deficit at or below approximately 3% of GDP in 2026 and 2027. That leaves fiscal space for investment but limits the government’s ability to simultaneously subsidise electricity, reduce fuel excise duties, increase public-sector incomes and finance the Expo 2027 construction programme. Temporary measures can cushion an energy shock but do not eliminate its underlying cost. Holding regulated electricity prices below cost transfers the burden to EPS or the state, while reducing fuel excise revenue protects consumers but weakens public finances. Higher wages and pensions can support retail activity but can also sustain services inflation and increase imports. Productivity growth, particularly among domestically owned companies capable of exporting higher-value products and services, provides a more durable source of household income and fiscal revenue.

Expo investment increases the importance of capital allocation

Public investment remains another major pressure point. Roads, railways, energy infrastructure and the Expo 2027 programme are supporting construction, employment and equipment imports while increasing the state’s role as the main investment coordinator. The long-term economic return will depend on project selection, procurement quality, lifecycle costs and the ability of new infrastructure to improve private-sector productivity after Expo-related construction is completed. Construction expenditure contributes to GDP while projects are being built, but the lasting economic value differs substantially between individual assets.

A transmission line that eliminates a grid bottleneck can enable renewable generation and industrial investment for decades. An oversized or underutilised facility can instead leave the government with continuing operating and maintenance costs. The distinction will become more important as Expo-related spending reaches its peak and Serbia seeks additional growth sources after 2027.

External financing becomes more important as FDI weakens

Financing conditions remain manageable, but the composition of external funding requires attention. Serbia’s current-account deficit was approximately 4.8% of GDP in 2025 and is projected at around 5.4% in 2026, partly because of equipment imports and Expo-related expenditure. Such a deficit is sustainable when it is financed by stable foreign direct investment. It becomes more sensitive when FDI declines and borrowing assumes a greater role.

Gross FDI inflows fell to approximately €3.5 billion in 2025, about 33.5% below the record level reached in 2024. During the first quarter of 2026, inflows were approximately €369 million, roughly half the level recorded a year earlier. The decline does not constitute an immediate financing crisis given Serbia’s foreign-exchange reserves, but it changes the composition of external financing and increases the importance of maintaining investor confidence.

Labour shortages raise infrastructure and industrial costs

Labour availability is becoming another structural constraint. Energy projects, industrial facilities, transport infrastructure and commercial construction are competing for a limited pool of engineers, electricians, welders, machine operators, construction managers and qualified tradespeople. Demographic ageing and continued emigration mean that the shortage is no longer simply a temporary labour-market imbalance.

Foreign workers can fill positions in construction, logistics and hospitality, but imported labour does not automatically replace specialised technical expertise. Serbia therefore requires vocational education, employer-led training, incentives for returning professionals and predictable arrangements for qualified foreign workers. Labour scarcity also affects project economics. It raises EPC costs, extends construction schedules and increases the risk that completed facilities lack sufficient commissioning, maintenance and operational capacity. For energy and industrial projects, the period between physical construction completion and reliable commercial operation can have substantial financial consequences.

Domestic suppliers face financing and workforce constraints

Serbia’s small and medium-sized enterprises could help address some of these capacity shortages, but the country’s investment model remains heavily dependent on major foreign manufacturers and state-led infrastructure programmes. Foreign investment has brought employment, exports and technology, while local supplier development remains uneven.

Smaller businesses face higher financing costs, limited collateral, delayed payments and difficulties competing for skilled workers. Tax incentives for start-ups can provide support, but a broader requirement is a financing and procurement system that allows Serbian engineering, manufacturing and service companies to enter the supply chains of major industrial investors. Banks can support that process through working-capital facilities, factoring, equipment finance and longer-term lending linked to verified contracts. Public procurement can also contribute by dividing suitable contract packages into sizes accessible to qualified domestic contractors while maintaining technical, environmental and financial standards.

The principal economic issue for Serbia through the remainder of 2026 is therefore the cost of maintaining stability rather than the immediate prospect of an outright energy shortage. Foreign-exchange reserves, moderate public debt and a resilient banking system provide significant protection, while emergency electricity imports, regulated tariffs and fuel reserves can help manage a difficult season.

At the same time, new generation, energy storage, transmission reinforcement, diversified fuel logistics and cleaner electricity for export-oriented industry remain necessary alongside the Expo 2027 investment cycle, particularly as GDP growth moves toward the 2.8–3% range, foreign investment weakens and Expo-related expenditure approaches its peak.