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External costs of electricity represent the monetary value of the environmental damage caused by electricity generation. They are here calculated applying the impact pathway methodology on Croatian specific conditions. This paper estimates the external costs of coal and gas fired power plants determined as main candidates for Croatian power system expansion till 2030. It is analyzed how the estimated external costs, when incorporated into total production costs, would affect the competitiveness of fossil–fired plants compared to other electricity generation options, i.e. how they influence the optimal expansion strategy of the Croatian power system.