The South-Eastern European power system is undergoing a structural transformation in which coal has ceased to function as a stabilizing marginal technology and has been relegated to a residual, largely non-price-setting role. The 26 February 2026 trading session offered a clear demonstration of this shift. Coal units were present in the generation mix, yet their influence on price formation was minimal. Instead, the market oscillated between two dominant regimes: renewable-led price suppression during daylight hours and gas-set scarcity pricing during evening ramps. This binary structure is not transitional; it is becoming the defining characteristic of SEE power markets.
Coal’s historical role in the region was to provide a buffering marginal layer. When demand increased or hydro underperformed, coal plants would enter the merit order and set prices at relatively predictable levels, smoothing volatility between base and peak. That role has eroded decisively. Rising carbon costs, aging coal fleets, and competition from low-marginal-cost renewables have combined to remove coal from the marginal stack under normal operating conditions.
On 26 February, coal accounted for roughly 18 percent of regional generation, yet this share did not translate into marginal influence. Even during periods of higher demand, coal units were often priced out by a combination of renewables, imports, and gas. The decisive factor is the cost structure. With EUA prices elevated and expected to remain structurally firm, coal’s variable cost frequently exceeds that of gas on a clean spark basis. As a result, coal no longer sets the clearing price except under rare stress scenarios such as extreme cold spells, outages, or prolonged renewable droughts.
This change simplifies the marginality tree but increases volatility. The market now flips between two price-setting regimes rather than transitioning smoothly across multiple layers. During periods of high renewable output, particularly solar, prices collapse toward operational floors. During periods of low renewable availability, gas-fired units abruptly become marginal, pushing prices upward toward clean spark levels. The absence of coal as an intermediate layer means there is little damping between these states.
The binary nature of price formation is particularly evident in southern SEE markets. Serbia, North Macedonia, and Montenegro experienced extended midday periods where coal units were fully displaced, resulting in prices near zero or at deeply depressed levels. In the evening, coal did not return to stabilize prices; instead, gas units set the marginal price almost immediately as solar output declined. This led to rapid price escalation within a narrow time window. Coal’s inability to reassert marginality exacerbated the speed and amplitude of these transitions.
Hungary exhibits a moderated version of the same phenomenon. While coal still contributes to generation, its marginal role is limited. Imports from Austria and Slovakia, combined with domestic renewables and gas, dominate price formation. Coal may run for system stability or contractual reasons, but it rarely sets the clearing price. As a result, Hungarian prices display sharp intraday swings similar in shape, if not in magnitude, to those seen further south.
Carbon pricing is the decisive accelerant of this trend. With EUA costs embedded into coal generation, even modest increases in carbon prices disproportionately affect coal’s competitiveness. The 26 February session occurred against a backdrop of rising EUA forward prices, reinforcing the structural disadvantage of coal. Unlike gas, which benefits from efficiency improvements and flexible operation, coal plants are burdened with both higher emissions and lower responsiveness. The market increasingly penalizes these attributes.
The implications for volatility are profound. In a system with three or four marginal layers, price changes tend to be incremental as the system moves from one layer to the next. In a binary system, price changes are abrupt. The removal of coal as a marginal buffer means that small changes in renewable output or demand can trigger large price moves. A few hundred megawatts of solar output disappearing at sunset can flip the system from surplus to scarcity almost instantaneously.
This dynamic has material consequences for asset valuation and trading strategy. Coal plants, once valued for their ability to provide steady marginal pricing, now face shrinking revenue windows. Their operating hours are squeezed between renewable dominance and gas-driven peaks, leaving limited opportunities to capture margin. Even when coal runs, it often does so below marginal price levels, further eroding profitability.
For trading desks, the rise of binary price formation shifts the focus away from fuel spreads involving coal. Traditional dark spread strategies lose relevance as coal’s influence wanes. Instead, the key trade-offs involve renewable output forecasting and gas price exposure during peak hours. The market effectively asks a single question each hour: are renewables sufficient, or is gas required? Coal is rarely part of the answer.
This binary structure also increases the importance of forecasting errors. When the system balances on a knife edge between surplus and scarcity, small miscalculations can have outsized price impacts. Overestimating solar output by a few percent may result in unexpected scarcity and price spikes. Underestimating it may lead to prolonged price suppression. Traders must therefore refine forecasting models and incorporate higher-resolution weather and generation data.
The decline of coal marginality also interacts with cross-border flows. In a coal-buffered system, local coal plants could absorb shocks without immediately affecting neighboring markets. In the current binary regime, shocks propagate more quickly across borders. A drop in renewable output in one market triggers increased imports from neighbors, transmitting scarcity signals regionally. Conversely, a surge in solar output can flood neighboring markets with surplus if interconnection capacity allows. Coal’s diminished role removes a layer of insulation between markets.
Policy considerations further entrench this trajectory. Environmental regulations and decarbonization targets discourage investment in coal refurbishment or life extension. Even where coal capacity remains operational, its strategic importance is declining. System operators may rely on coal for security of supply in extreme scenarios, but market pricing increasingly reflects a post-coal logic.
Looking ahead, the binary price formation regime is likely to intensify rather than soften. Renewable capacity continues to expand, particularly solar in southern SEE markets. Gas remains the primary flexible thermal option, and carbon pricing shows no sign of reversal. Without substantial investment in storage or demand-side flexibility, the system will continue to oscillate between renewable surplus and gas-driven scarcity with little middle ground.
The 26 February 2026 session thus serves as a clear marker of coal’s diminished role. Coal is still present, but it no longer shapes prices. The market has moved beyond a gradual transition; it has crossed a threshold. Price formation is now binary, and volatility is the natural consequence. For trading desks, acknowledging this reality is essential. Strategies built on coal’s historical marginal role risk systematic mispricing, while those adapted to binary dynamics are better positioned to capture the opportunities and manage the risks of the new regime.
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