Congestion Management Economics

1. Introduction

Congestion management economics deals with the economic methods used to manage situations where electricity transmission or distribution networks do not have enough capacity to carry all desired electricity flows. Congestion occurs when a transmission line, transformer, substation or other network element reaches its technical limit.

Congestion is not only an engineering problem. It is also an economic and legal problem because limited network capacity affects electricity prices, generators, consumers, investment decisions and access to the electricity market.

The central economic question is: Who should use scarce network capacity, at what price, and according to which rules?

2. Economic Meaning of Grid Congestion

Electricity must generally be produced and consumed almost simultaneously. When a transmission corridor becomes constrained, cheaper electricity from one location may not be able to reach consumers in another location.

For example, suppose a renewable-energy plant produces electricity at a low cost in one province, but the transmission network connecting that province to a major city is already full. The system operator may have to reduce the renewable generator's output and use a more expensive generator closer to the demand centre.

This creates an economic cost of congestion.

Congestion management therefore attempts to minimise the total cost of supplying electricity while maintaining network security.

3. Main Economic Methods

A. Redispatch

Redispatch means changing the output of generators because of network constraints. A low-cost generator may be reduced while another generator is increased.

The economic problem is deciding who bears the cost of this adjustment.

B. Curtailment

Curtailment occurs when available generation is deliberately reduced because the grid cannot safely transport all the electricity.

This is particularly important for renewable energy. A solar or wind producer may have electricity available but be unable to export it because of transmission congestion.

C. Congestion Pricing

In some electricity markets, different locations have different electricity prices depending on transmission constraints. This is commonly known as locational marginal pricing.

The price difference between two locations can provide an economic signal showing where transmission capacity is scarce.

D. Network Charges

Network users may contribute to the costs of maintaining and expanding transmission infrastructure. Proper network charging can help allocate scarce capacity and support long-term investment.

4. South African Legal and Economic Framework

South Africa does not currently operate a fully developed locational marginal pricing system comparable to some international wholesale electricity markets. Congestion management must therefore be understood through the Electricity Regulation Act 4 of 2006, NERSA regulation, electricity licences, tariffs and the South African Grid Code.

In Eskom Holdings SOC Ltd v Lekwa Ratepayers Association (2022), the Supreme Court of Appeal confirmed that generation, transmission and distribution are regulated under the Electricity Regulation Act and that NERSA has important licensing and regulatory powers.

This is economically important because network-access and congestion decisions cannot simply be determined by private commercial interests; they operate within a regulated electricity framework.

5. Important Case Laws

Eskom Holdings SOC Ltd v NERSA (2017)

This case concerned NERSA's additional electricity tariff determination. The Supreme Court of Appeal dealt with the relationship between the regulator's economic expertise and judicial review.

The case is relevant to congestion management economics because decisions concerning electricity prices and network costs involve complex economic and technical judgments. Regulatory decisions must nevertheless remain lawful and rational.

Eskom Holdings SOC Ltd v Vaal River Development Association (2022)

The Constitutional Court considered Eskom's reduction of electricity supply to municipalities. The case involved contracted maximum demand and penalties for exceeding agreed network demand.

This demonstrates that network capacity has an economic value. When customers exceed agreed demand levels, the regulatory framework can impose financial consequences. Such mechanisms can discourage excessive use of constrained network capacity.

Eskom Holdings SOC Ltd v Sonae Arauco (2024)

The Supreme Court of Appeal considered the operation of the Grid Code and Eskom's responsibility to protect the reliable operation of the national grid. The Court explained that the system operator must take prompt remedial action where an abnormal condition threatens reliable operation.

The case did not directly concern congestion pricing. However, it is relevant by analogy because economic congestion-management mechanisms cannot override technical grid-security requirements.

United Democratic Movement v Eskom (2023)

The High Court considered load-shedding and the protection of the national electricity grid. The judgment recognised the serious economic and social consequences of electricity shortages and grid failure.

This illustrates an important economic principle: congestion management cannot focus only on electricity prices. The cost of a major grid failure can be substantially greater than the cost of preventive congestion management.

6. Competition and Fair Access

Congestion management can also create competition-law concerns. If a network operator controls scarce transmission capacity, decisions about which generators receive access can influence competition.

Rules should therefore prevent discriminatory allocation of network capacity. Transparent congestion-management procedures can reduce the possibility of favouritism, strategic withholding of capacity or exclusion of competing generators.

The Sibanye Gold v Eskom (2026) case provides a useful modern example. The High Court considered Eskom's refusal of a wayleave connected with a proposed solar PV project and found the refusal unlawful, setting it aside under PAJA.

Although this was not a congestion-pricing case, it demonstrates why infrastructure-access decisions must have a lawful and properly supported basis.

7. Economic Efficiency and Future Grid Planning

Good congestion management should create incentives for:

investment in new transmission lines;

battery storage;

renewable generation in locations with available network capacity;

demand-side management;

flexible generation;

improved interconnection;

efficient use of existing infrastructure; and

accurate forecasting of future congestion.

The objective should be to reduce the total economic cost of congestion while protecting reliability and fair access.

Conclusion

Congestion management economics connects electricity engineering, market design and energy regulation. When network capacity becomes scarce, the legal system must determine how that capacity is allocated, how costs are recovered and how competing users are treated.

South African cases such as Eskom v NERSA, Vaal River Development Association, Sonae Arauco, and Sibanye Gold demonstrate important principles concerning tariff regulation, network capacity, grid reliability and lawful infrastructure-access decisions. Although South African law has not yet developed a comprehensive doctrine specifically called “congestion management economics”, these principles provide a foundation for developing transparent and economically efficient congestion-management rules.