Congestion Revenue Allocation Rules

1. Introduction

Congestion revenue allocation rules are the legal and economic rules that determine how revenue arising from transmission congestion should be calculated, collected, allocated and used.

Electricity transmission networks have limited capacity. When many generators and consumers want to use the same transmission corridor, the network can become congested. In electricity markets using location-based pricing, congestion may create a price difference between two locations. The resulting financial amount is commonly described as congestion revenue.

The main legal question is not simply how much revenue is generated, but who should receive it and how it should be used.

2. Meaning of Congestion Revenue

Consider two electricity locations connected by a transmission line.

Location A electricity price = R500/MWh

Location B electricity price = R800/MWh

Available transmission capacity = 100 MW

The price difference is R300/MWh. If the full 100 MW is transferred, the theoretical congestion value is R30,000 per hour.

A congestion-revenue allocation framework determines whether this money should be used for transmission investment, compensation, reduction of network charges, or other legally authorised purposes.

South Africa does not currently have a comprehensive statutory system specifically called "congestion revenue allocation." Therefore, the concept would need to operate within the broader electricity tariff, transmission and regulatory framework.

3. Main Allocation Rules

A. Transmission Investment

One possible rule is to use congestion revenue for expanding or strengthening the transmission network.

Revenue could support:

new transmission lines;

substations;

transformers;

interconnectors; and

grid reinforcement.

This approach links the revenue to the underlying problem that created it.

B. Compensation for Transmission Rights

Where a market uses financial or physical transmission rights, congestion revenue may be allocated to satisfy obligations associated with those rights.

This provides greater certainty to market participants who have paid for protection against congestion-related price differences.

C. Reduction of Network Charges

Another approach is to return congestion revenue to network users through reduced transmission or network charges.

This can prevent consumers from being charged excessive network costs when congestion revenues are already available.

D. System Operation

A regulated portion may be used to cover legitimate costs associated with system operation, market administration and congestion management.

However, the network operator should not automatically treat congestion revenue as unrestricted profit.

E. Consumer Benefits

A regulator may also design rules that return some benefits to electricity consumers. Such an approach can be relevant where congestion revenues become significant and consumers have contributed to the cost of the transmission system.

4. South African Legal Framework

The Electricity Regulation Act 4 of 2006 (ERA) provides the central framework for electricity regulation in South Africa. Section 15 requires electricity pricing and revenue regulation to enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return.

South African courts have increasingly emphasised cost-of-supply principles in electricity tariff regulation. In AfriForum NPC v NERSA (2024), the High Court held that NERSA's municipal tariff-approval mechanism was unlawful where it did not properly follow the statutory cost-of-supply framework.

This principle would be important for any future congestion-revenue rules because revenue allocation should have a rational connection to regulated electricity costs and network requirements.

5. Relevant Case Laws

Eskom Holdings SOC Ltd v NERSA (2017)

The Supreme Court of Appeal considered NERSA's regulatory authority concerning electricity tariffs and Eskom's allowable revenue. The case demonstrates the importance of respecting the statutory role of the specialist electricity regulator.

For congestion revenue, the principle is relevant because the collection and allocation of regulated transmission revenue should be subject to proper regulatory authority rather than unilateral decisions by a network operator.

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

The Constitutional Court examined Eskom's electricity-supply obligations and NERSA's tariff-regulation framework. The Court discussed the Multi-Year Price Determination Methodology and the relationship between Eskom's costs, revenue requirements and electricity tariffs.

This is relevant by analogy because congestion revenues would form part of the broader economic structure of transmission-system regulation.

Nelson Mandela Bay Business Chambers v NERSA (2022)

This case was particularly important for electricity tariff methodology. The court required the application of a cost-of-supply methodology rather than a simple benchmarking approach.

The principle is directly relevant to congestion-revenue rules: revenue mechanisms should be based on identifiable electricity-system costs and rational regulatory methodology rather than arbitrary amounts. The later AfriForum judgments reaffirmed the importance of cost-of-supply information.

AfriForum NPC v NERSA (2025)

In the 2025 litigation, the High Court found NERSA's implementation of its public-participation process for municipal electricity tariff approvals constitutionally invalid. The court required greater transparency concerning tariff applications and cost-of-supply studies.

The case is important for congestion-revenue allocation because a future methodology affecting generators, municipalities, network users and consumers would require transparent regulatory procedures and meaningful participation.

6. Principles for a Proper Allocation Framework

A sound congestion-revenue system should follow several principles:

Transparency: The amount and source of congestion revenue should be identifiable.

Accountability: The transmission operator should explain how the revenue is calculated and used.

Cost-reflectivity: Allocation should have a rational relationship to legitimate network costs.

Non-discrimination: Comparable network users should not be treated unfairly.

Efficiency: Revenue should encourage efficient use and expansion of the grid.

Consumer protection: Revenue mechanisms should not unnecessarily increase electricity costs.

Regulatory supervision: NERSA or another legally authorised institution should approve and monitor the framework.

7. Importance for Future Energy Markets

Congestion revenue allocation will become more significant as South Africa develops renewable-energy projects, independent power producers, battery storage, wheeling arrangements and regional electricity trading.

A properly designed framework could direct congestion-related financial resources toward transmission expansion and better integration of renewable generation.

At the same time, clear rules are necessary to prevent congestion revenue from becoming an uncontrolled source of additional charges or profits.

Conclusion

Congestion revenue allocation rules determine how financial value created by scarce transmission capacity is managed. Possible uses include transmission expansion, compensation for transmission rights, reduction of network charges, legitimate system-operation costs and consumer benefits.

South African courts have not yet developed a dedicated legal doctrine on congestion revenue allocation. However, Eskom v NERSA, Vaal River Development Association, Nelson Mandela Bay Business Chambers v NERSA, and AfriForum v NERSA establish important principles concerning regulatory authority, cost-of-supply methodology, transparency, efficiency and public participation. These principles can provide the legal foundation for developing future congestion-revenue allocation rules within South Africa's evolving electricity market.