Congestion Pricing in Transmission Networks

1. Introduction

Congestion pricing in transmission networks refers to the economic and regulatory methods used to manage situations where the electricity transmission network does not have enough capacity to carry all desired electricity flows.

Electricity networks have limited capacity. When demand for transmission exceeds available capacity, the system operator must decide which electricity transactions can proceed and how the costs created by the constraint should be allocated.

Congestion pricing therefore connects electricity economics, transmission planning, market regulation and consumer protection.

2. Meaning of Transmission Congestion

Transmission congestion occurs when electricity flows approach or exceed the safe operating limit of a transmission line, transformer or other network component.

For example, suppose a renewable-energy region produces large quantities of inexpensive electricity, but the transmission network connecting that region to Johannesburg is insufficient. The system operator may be unable to transport all the available electricity.

This can produce two economic effects:

inexpensive generation may have to be curtailed; and

more expensive generation may have to operate closer to the demand centre.

The resulting difference represents part of the economic cost of congestion.

3. How Congestion Pricing Works

One approach is locational pricing. Electricity prices can differ according to the location where electricity is generated or consumed.

When transmission capacity is available, electricity can move between locations and prices may become closer. When a transmission constraint develops, prices can separate because additional electricity cannot freely move across the constrained network.

Another approach is to recover congestion-related costs through network charges. Users contribute to the cost of maintaining and expanding transmission infrastructure according to regulated tariff principles.

Congestion pricing can therefore perform two functions:

allocate scarce transmission capacity; and

provide economic signals for future investment.

4. South African Legal Framework

South Africa does not currently have a comprehensive locational marginal pricing regime comparable to some international electricity markets. Transmission and electricity tariffs are instead governed through the Electricity Regulation Act 4 of 2006 (ERA), NERSA's regulatory framework, licences, tariff methodologies and Grid Code requirements.

Section 15 of the ERA is particularly important because electricity tariffs must be determined according to the statutory tariff framework. Recent South African litigation has also emphasised cost-of-supply principles in electricity tariff regulation. In AfriForum NPC v NERSA (2025), the High Court discussed section 15(1) and the requirement for tariff determination based on the cost of supply and a reasonable return.

5. Relevant Case Laws

Eskom Holdings SOC Ltd v NERSA (2017)

In this case, the Supreme Court of Appeal considered NERSA's approval of an additional electricity tariff increase. The Court recognised the importance of NERSA's specialised regulatory role in electricity pricing and tariff determination.

The case is relevant to congestion pricing because transmission charges and congestion-related costs would have to operate within NERSA's statutory regulatory authority.

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

The Constitutional Court considered Eskom's electricity-supply obligations and its financial responsibilities. The Court explained the importance of NERSA's Multi-Year Price Determination Methodology, which regulates Eskom's required revenues through a cost-of-service approach and incentives for efficiency.

This principle is important for congestion pricing because transmission charges should balance the financial sustainability of the electricity system with reasonable and efficient costs for users.

Nelson Mandela Bay Business Chambers v NERSA (2022)

This case is important for the development of electricity tariff methodology. The litigation challenged the use of benchmarking rather than a proper cost-of-supply methodology. The later AfriForum v NERSA judgment recorded that the court in Nelson Mandela Bay Business Chambers directed that the cost-of-supply methodology required by section 15(1)(a) of the ERA and the Electricity Pricing Policy should be followed.

The case is therefore relevant to the economic principle that electricity-network charges should have a rational relationship to the costs of supplying and using the network.

AfriForum NPC v NERSA (2025)

The High Court dealt with NERSA's municipal electricity-tariff approval process and public participation. The court emphasised that electricity tariffs are regulated under section 15 of the ERA and that tariff processes must be conducted within the required legal and participatory framework.

Although the case did not decide congestion pricing specifically, it demonstrates that pricing mechanisms in the electricity sector must satisfy statutory and administrative-law requirements.

6. Economic and Legal Challenges

Congestion pricing raises several important questions.

First, fairness: consumers should not face unreasonable charges merely because they are located behind a congested network.

Second, transparency: users should understand how transmission costs are calculated.

Third, investment: congestion prices should encourage investment in transmission lines, storage and flexible generation where economically justified.

Fourth, market power: owners or operators controlling scarce transmission capacity must not use congestion mechanisms unfairly to exclude competitors.

Fifth, public participation: major tariff methodologies should be developed through lawful regulatory processes.

7. Conclusion

Congestion pricing is an important mechanism for managing scarce transmission capacity. It can allocate network capacity, reveal the economic value of transmission constraints and encourage investment in grid expansion.

South African law has not yet created a fully developed congestion-pricing doctrine. However, Eskom v NERSA, Vaal River Development Association, Nelson Mandela Bay Business Chambers v NERSA, and AfriForum v NERSA establish important principles concerning tariff regulation, cost-based pricing, regulatory expertise, financial sustainability and public participation. These principles can provide a legal foundation for developing future congestion-pricing mechanisms as South Africa's electricity market becomes more decentralised and transmission capacity becomes increasingly valuable.