Connection Cost Allocation Principles

1. Introduction

Connection cost allocation principles determine how the costs of connecting a new electricity generator, consumer or embedded-generation facility to the electricity network should be distributed. They are important because new connections may require substations, transformers, transmission lines, protection equipment, metering and network reinforcement.

In South Africa, these principles operate through the Electricity Regulation Act 4 of 2006 (ERA), NERSA-approved tariff methodologies, the South African Grid Code, licence conditions and connection agreements. The Grid Code provides specific rules for distinguishing connection costs from broader transmission-use-of-system costs.

2. Cost-Causation Principle

The first principle is cost causation. The person or entity whose connection creates the need for particular infrastructure should generally contribute towards the cost of that infrastructure.

For example, if a new wind farm requires a dedicated transformer and connection bay, those assets may be treated as connection costs. However, a transmission upgrade that benefits many users may be treated as a wider network cost.

This principle prevents existing customers from automatically carrying all costs generated by a new connection.

3. Dedicated and Shared Costs

A second principle is the distinction between dedicated connection assets and shared network assets.

The South African Transmission Tariff Code provides examples where a generator's transformer bay, metering and protection equipment constitute connection costs, while common station facilities and certain line sections may be treated as transmission-use-of-system costs.

This distinction is particularly important when several generators use the same substation or transmission infrastructure.

4. Least-Cost Principle

Connection planning should normally consider the least-cost technically appropriate connection.

Where a customer chooses a more expensive connection for its own reasons, the additional cost may need to be allocated appropriately rather than automatically being transferred to other network users.

The Grid Code recognises situations where a connection different from the least-cost option is selected for system reasons and provides rules for allocating the resulting costs.

5. Non-Discrimination

Another important principle is non-discriminatory treatment. Users in comparable circumstances should be assessed according to the same approved methodology.

This is especially important for independent power producers and distributed generators. A network operator should not arbitrarily impose different connection-cost requirements on similar projects without a legitimate regulatory or technical basis.

6. Transparency and Predictability

Connection applicants should be able to understand:

the infrastructure required;

the calculation of connection charges;

the amount payable;

the reason for the charge;

whether costs are dedicated or shared; and

the consequences of changing the requested capacity.

In Vaal River Development Association v Eskom (2020), the High Court considered changes to Notified Maximum Demand (NMD) and Maximum Export Capacity (MEC). The relevant rules provided that a quotation for a change could include additional dedicated costs and upstream sharing charges, and that the methodology should comply with the Grid Code Transmission Tariff Code.

7. Cost Reflectivity

South African tariff law also requires charges to provide appropriate information about the costs imposed by electricity use. Section 15 of the ERA requires tariffs to enable an efficient licensee to recover the full cost of its licensed activities while giving users information about the costs their consumption imposes on the licensee. The Constitutional Court discussed these principles in Eskom Holdings SOC Ltd v Vaal River Development Association (2022).

Thus, connection charges should have a rational relationship with the costs and network requirements associated with the connection.

8. Regulatory Approval

A network operator cannot simply impose any charge it wishes. The applicable tariff must operate within the regulatory framework approved by NERSA.

The SCA in Eskom Holdings SOC Ltd v Lekwa Ratepayers Association; Eskom Holdings SOC Ltd v Vaal River Development Association (2022) recognised that electricity supply arrangements operate within the statutory framework of the ERA and NERSA regulation.

This principle is important because connection agreements remain subject to mandatory regulatory requirements.

9. Renewable-Energy Connections

These principles are increasingly important for solar, wind, battery storage and embedded-generation projects. Developers require predictable connection costs before making large investments.

The 2026 Sibanye Gold v Eskom case illustrates this practical importance. Sibanye had accepted a budget quotation for a solar project and paid a connection-charge guarantee. Eskom later proposed an alternative connection involving additional wheeling costs. The High Court ultimately reviewed and set aside Eskom's refusal of the required wayleave. The case was primarily an administrative-law dispute, but it demonstrates the importance of predictable and properly justified network-access arrangements for private generation.

Conclusion

The major connection cost allocation principles are:

Cost causation – costs should generally follow the infrastructure requirement created by the connection.

Dedicated versus shared costs – individual connection assets should be distinguished from common network infrastructure.

Least-cost connection – technically appropriate and economically efficient options should be considered.

Non-discrimination – comparable users should receive comparable treatment.

Transparency – applicants should understand how charges are calculated.

Cost reflectivity – charges should have a rational relationship with network costs.

Regulatory compliance – charges must comply with NERSA-approved methodologies and the Grid Code.

Together, these principles create a framework for allocating connection costs fairly while supporting efficient grid development and the expansion of new electricity generation in South Africa.