1. Introduction

Interconnector congestion pricing and allocation rules govern how scarce transmission capacity between two or more electricity markets is priced, allocated, and managed when the demand for cross-border electricity transfers exceeds the physical capacity of the interconnector.

An interconnector may link:

two national electricity systems;

different bidding zones within a regional market;

synchronous or asynchronously connected grids;

offshore and onshore electricity networks; or

electricity markets operating under different regulatory regimes.

Congestion occurs when the available transfer capacity is insufficient to accommodate all economically desirable electricity flows. The legal framework must therefore determine who receives capacity, at what price, according to which priority rules, and how congestion revenues are used.

In modern electricity law, congestion management is closely connected with market coupling, non-discriminatory access, transmission rights, scarcity pricing, network security, competition law, and consumer protection.

2. Meaning of Interconnector Congestion

An interconnector has a finite physical transfer capability. Suppose Country A can export only 1,000 MW to Country B, but market participants collectively seek to transfer 1,500 MW. The 500 MW excess creates congestion.

Congestion can arise because of:

physical thermal limits;

voltage or stability constraints;

network security requirements;

loop flows;

insufficient interconnector capacity;

outages or maintenance;

differences in generation and demand patterns; and

market coupling arrangements.

Congestion is therefore not merely a technical issue. It has a direct economic and legal effect because it determines which market participants can access scarce cross-border capacity.

3. Legal Objectives of Congestion Pricing

A sound congestion-management regime generally pursues several objectives.

A. Efficient use of scarce capacity

Capacity should ordinarily be allocated to transactions producing the greatest economic value.

B. Non-discrimination

Transmission access should not favour particular generators, suppliers, traders, or vertically integrated incumbents without a lawful justification.

C. Market integration

Congestion rules should facilitate efficient cross-border electricity trading rather than unnecessarily fragmenting markets.

D. Security of supply

Allocation mechanisms cannot compromise system security.

E. Transparency

Available capacity, allocation methodologies, prices and congestion revenues should be transparent.

F. Prevention of market manipulation

Participants should not be permitted to acquire or withhold interconnector capacity merely to distort electricity prices.

4. Congestion Pricing

Congestion pricing reflects the scarcity of transmission capacity.

The simplest economic model is based on the difference between electricity prices in two connected markets.

Suppose:

Market A price = €50/MWh

Market B price = €90/MWh

Interconnector capacity = 1,000 MW

The €40/MWh price difference represents a potential value associated with transferring electricity from A to B, subject to network constraints.

If the interconnector becomes fully congested, the price difference may remain between the two markets. This difference can generate congestion rent.

Basic formula

Congestion Revenue=(PB−PA)×QCongestion\ Revenue = (P_B-P_A)\times Q

where:

PAP_A = electricity price in exporting market;

PBP_B = electricity price in importing market; and

QQ = electricity transferred across the interconnector.

For example:

(€90−€50)×1,000=€40,000/hour(€90-€50)\times1,000 =€40,000/hour

This does not mean that the interconnector owner is automatically entitled to treat the amount as ordinary profit. Regulatory frameworks generally prescribe how congestion revenues must be used.

5. Explicit Allocation

Under explicit allocation, transmission capacity is allocated separately from electricity.

A market participant may purchase:

the right to transmit electricity; and

electricity itself.

For example, a trader purchases 500 MW of interconnector capacity through an auction and subsequently buys electricity in the exporting market.

The advantage is conceptual simplicity.

However, explicit allocation can create inefficiency because the trader may obtain transmission capacity without ultimately using it economically.

It can also require participants to make separate decisions regarding electricity and transmission markets.

6. Implicit Allocation

Modern integrated electricity markets frequently favour implicit allocation.

Here, electricity and interconnector capacity are allocated simultaneously through market coupling.

The algorithm effectively determines:

which generators produce electricity;

which consumers are served;

the direction of cross-border flows;

how much interconnector capacity is used; and

the resulting market-clearing prices.

Thus, if electricity is cheaper in Country A and more expensive in Country B, the coupling mechanism tends to allocate available interconnector capacity from A toward B.

7. Market Coupling

Market coupling is one of the most important mechanisms for congestion management.

Suppose:

If sufficient interconnector capacity exists, electricity will flow from A to B until prices converge or the physical transmission limit is reached.

If the interconnector has sufficient capacity, prices may converge toward a common market-clearing price.

If the interconnector becomes congested, the markets may retain different prices.

This produces a fundamental legal distinction:

Congestion is not necessarily a regulatory failure; it can be the legally recognised consequence of scarce network capacity.

8. Allocation Rules

Interconnector capacity may be allocated through several mechanisms.

A. First-Come, First-Served

Capacity is allocated according to the timing of applications.

Although administratively simple, this approach can be problematic because it may reward speed rather than economic efficiency.

B. Pro-Rata Allocation

Available capacity is divided proportionally among qualifying requests.

For example, if:

available capacity = 1,000 MW;

total requests = 2,000 MW;

each participant may receive approximately 50% of its requested capacity.

C. Auction-Based Allocation

Capacity is allocated to market participants willing to pay the highest price.

Auctions can reveal the scarcity value of transmission capacity.

However, auction design must address:

market power;

information asymmetry;

strategic bidding;

concentration;

transparency; and

access for smaller participants.

D. Market-Coupled Allocation

Market coupling incorporates transmission capacity directly into electricity-market clearing.

This generally allows capacity to be directed toward transactions producing the highest market value within the relevant algorithm and constraints.

9. Congestion Rent

Congestion rent is an important legal and regulatory concept.

Suppose electricity flows from a €50/MWh market to a €80/MWh market over an interconnector carrying 1,000 MW.

The theoretical congestion rent is:

(80−50)×1000=€30,000/hour(80-50)\times1000 = €30,000/hour

The question then becomes:

Who should receive this revenue and for what purpose?

Modern regulatory frameworks commonly require congestion revenues to be used for purposes such as:

guaranteeing the availability of allocated capacity;

maintaining or increasing interconnection capacity;

financing network investment;

addressing congestion; or

other legally prescribed transmission-system purposes.

The legal principle is that congestion revenue should generally support the efficient functioning of the network rather than become an unrestricted source of windfall revenue.

10. Financial Transmission Rights

Some systems use Financial Transmission Rights (FTRs) or comparable financial instruments.

An FTR can provide a financial hedge against differences between electricity prices in two locations.

For example:

FTR payoff=(Pimport−Pexport)×Contracted QuantityFTR\ payoff = (P_{import}-P_{export})\times Contracted\ Quantity

If the price difference increases, the holder receives a corresponding financial benefit.

This separates the financial management of congestion risk from the physical scheduling of electricity.

11. Physical Transmission Rights

A Physical Transmission Right (PTR) gives the holder a contractual right to use specified transmission capacity.

Historically, cross-border electricity markets relied more heavily on PTRs.

However, where implicit allocation is used, physical rights can become difficult to reconcile with market coupling.

Consequently, modern frameworks frequently provide mechanisms under which physical rights can be converted into financial rights or otherwise integrated into the market-coupling system.

12. Use-It-or-Lose-It Rules

A major principle in interconnector regulation is the prevention of capacity hoarding.

If a participant purchases capacity but does not use it, the regulatory system may apply a use-it-or-lose-it rule.

The objective is to prevent strategic withholding of transmission capacity.

For example, a dominant electricity company might theoretically reserve significant interconnector capacity and then leave it unused, preventing competitors from accessing the market.

Regulation may therefore require unused capacity to be:

returned;

reallocated;

resold;

released into the market; or

subject to financial consequences.

13. Firmness and Curtailment

An important issue is whether allocated interconnector capacity is firm.

If a participant purchases transmission capacity, it may reasonably expect that the capacity will be available.

However, network operators may need to curtail flows because of:

emergencies;

unexpected outages;

system instability;

security constraints;

force majeure; or

inaccurate capacity forecasts.

The legal framework must therefore determine:

when curtailment is permitted;

which users are curtailed;

whether compensation is payable;

how compensation is calculated; and

whether the transmission operator bears liability.

14. Congestion Management and Competition Law

Congestion management can have significant competition-law consequences.

A transmission operator or dominant generator could potentially manipulate capacity to:

exclude competitors;

maintain price differences;

raise wholesale electricity prices;

restrict imports; or

protect incumbent generation.

Therefore, congestion rules must interact with:

abuse-of-dominance principles;

non-discrimination;

third-party access;

market-abuse rules; and

regulatory supervision.

The European experience is particularly important because cross-border electricity trading has historically been closely connected to EU competition and internal-energy-market law.

15. European Union Legal Framework

The European Union provides one of the most developed legal frameworks for cross-border congestion management.

Important instruments include:

the EU internal electricity market framework;

Regulation (EU) 2019/943 on the internal market for electricity;

Regulation (EU) 2015/1222 establishing a guideline on capacity allocation and congestion management; and

EU rules concerning transmission-system operation and cross-border electricity trading.

The basic regulatory philosophy is to treat interconnection capacity as a scarce network resource that should generally be allocated through transparent, market-based and non-discriminatory mechanisms.

EU congestion-management rules also place significant emphasis on cross-border capacity availability, coordinated capacity calculation and efficient use of transmission infrastructure.

16. European Case Law

A. Commission v Kingdom of Sweden — Case C-468/13

This case concerned restrictions associated with Sweden's electricity transmission system and the relationship between internal electricity-market rules and cross-border transmission constraints.

The litigation arose in the context of Sweden's electricity market and congestion between bidding areas.

The case is significant because it illustrates that the organisation of national electricity networks cannot be considered entirely independently of the EU objective of facilitating cross-border electricity trade.

The broader legal principle is that national network arrangements must be compatible with European electricity-market integration.

B. Commission v Federal Republic of Germany — Case C-718/18

This case concerned the independence and powers of national energy regulators under EU energy law.

The Court of Justice emphasised the importance of the regulatory framework governing national regulators and their ability to exercise powers assigned to them by EU legislation.

Although the case was not solely an interconnector-congestion dispute, it is relevant because congestion allocation requires independent regulatory supervision.

The case reinforces the institutional dimension of congestion regulation: market rules are only effective where regulators possess legally meaningful powers.

C. Baltic Cable AB v Bundesnetzagentur — Case C-578/18 P

This is particularly important for congestion-revenue regulation.

The dispute concerned the treatment of revenues associated with an electricity interconnector and the application of EU rules governing congestion revenues.

The Court considered the regulatory framework applicable to interconnector revenues and the powers of national authorities.

The case demonstrates that congestion revenues are not simply ordinary commercial revenues: their treatment can be subject to specific EU regulatory requirements.

D. Aquind Ltd v Commission — General Court, Case T-295/20

The Aquind litigation concerned an electricity interconnector project between Great Britain and France and EU regulatory treatment concerning exemption from certain internal-market requirements.

The case is significant because new interconnectors may require special regulatory treatment where investment risks are substantial.

It illustrates the tension between:

investment incentives;

third-party access;

market integration;

congestion management; and

regulatory oversight.

17. United Kingdom Context

Following Brexit, the UK's relationship with EU electricity markets changed significantly.

The UK continues to operate multiple interconnectors with European countries, including connections involving:

France;

Belgium;

the Netherlands;

Ireland; and

Norway.

The legal framework must address:

cross-border capacity;

electricity trading;

interconnector licensing;

system operation;

congestion management;

balancing;

market coupling arrangements; and

regulatory cooperation.

Of particular significance is the distinction between the UK's pre-Brexit implicit market coupling arrangements and the subsequent arrangements for cross-border electricity trading.

The UK's experience demonstrates that the design of congestion rules can materially affect the institutional architecture of electricity trading.

18. Indian Context

India does not operate an interconnector regime identical to the EU's multinational electricity-market system, but comparable legal principles arise in relation to inter-State transmission, open access, transmission congestion and power exchanges.

The central statutory framework includes the Electricity Act, 2003.

Important principles include:

non-discriminatory open access;

regulation of transmission;

system operation;

tariff regulation;

grid management; and

coordination between national and regional institutions.

The Central Electricity Regulatory Commission (CERC) plays a major role in regulating inter-State transmission and electricity markets.

Indian congestion management therefore provides a useful comparative example of how a federal electricity system can allocate scarce transmission capacity while maintaining grid security.

19. Indian Case Law

A. PTC India Ltd. v. Central Electricity Regulatory Commission, (2010) 4 SCC 603

This Supreme Court decision is foundational for Indian electricity regulation.

The Court examined the statutory authority of CERC and the relationship between regulations and statutory powers under the Electricity Act, 2003.

The case is relevant to congestion regulation because market-based electricity trading and transmission arrangements must operate within the statutory authority granted to the regulator.

It establishes the importance of distinguishing between:

statutory regulatory powers;

subordinate legislation;

tariff regulation; and

market rules.

B. Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80

The Supreme Court examined contractual and regulatory issues in the electricity sector, particularly in relation to power purchase agreements and regulatory intervention.

Although not an interconnector congestion case in the narrow sense, it is relevant to the allocation of regulatory risk in electricity markets.

The judgment illustrates that electricity regulation must balance contractual arrangements with statutory regulatory objectives.

C. Adani Power Ltd. v. Gujarat Electricity Regulatory Commission

Indian electricity jurisprudence involving Adani Power and state regulatory authorities demonstrates the importance of regulatory allocation of transmission and market risks.

Such cases are useful in understanding how congestion, transmission constraints and contractual obligations can interact in a regulated electricity market.

20. Congestion Management and Energy Security

Congestion rules cannot be based solely on economic efficiency.

A transmission system operator must preserve:

frequency stability;

voltage stability;

reserve margins;

system security;

emergency response capability; and

resilience against infrastructure failure.

Consequently, a regulator may permit capacity to be reduced even where additional commercial transfers would otherwise be economically beneficial.

This creates an important legal principle:

Market allocation is subordinate to mandatory system-security requirements.

However, security exceptions should be narrowly defined and transparently administered so that they cannot become a mechanism for arbitrary discrimination.

21. Priority Allocation

Some regulatory systems provide priority to particular categories of electricity.

Examples can include:

emergency electricity;

renewable generation;

essential public-service supply; or

legally protected system-security transactions.

Priority rules must be carefully designed because preferential allocation can distort competition.

Where priority is given, the legal framework should identify:

its statutory basis;

beneficiaries;

duration;

objective criteria;

compensation mechanisms; and

review procedures.

22. Congestion and Renewable Energy

Interconnectors play an increasingly important role in integrating renewable energy.

Solar and wind generation are geographically variable. Cross-border transmission allows electricity to move from regions with surplus renewable generation toward regions experiencing higher demand.

Congestion can therefore create renewable-energy curtailment.

Legal frameworks may respond through:

additional interconnector investment;

dynamic line rating;

coordinated capacity calculation;

storage;

redispatch;

flexibility markets; and

improved market coupling.

The regulatory challenge is to prevent congestion from unnecessarily undermining decarbonisation objectives.

23. Transparency Requirements

Effective congestion allocation requires disclosure of information concerning:

available transfer capacity;

allocated capacity;

outages;

congestion revenues;

auction results;

transmission constraints;

allocation methodologies; and

market-clearing prices.

Transparency reduces opportunities for market manipulation and allows participants to make informed decisions.

In sophisticated markets, regulators increasingly require near-real-time information about network availability.

24. Regulatory Governance

Congestion management usually involves several institutions:

Transmission System Operator

Responsible for physical network operation.

National Regulatory Authority

Supervises compliance with market and network rules.

Market Operator / Nominated Electricity Market Operator

Conducts or supports market coupling and market clearing.

Regional Coordination Bodies

Coordinate cross-border capacity calculations and system security.

Competition Authorities

Address anti-competitive conduct.

Courts and Tribunals

Review regulatory decisions and disputes.

This institutional division demonstrates that congestion pricing is both an economic mechanism and a legal-governance system.

25. Major Legal Principles

The principal legal principles governing interconnector congestion pricing and allocation can be summarised as follows:

26. Key Challenges

Future congestion regulation will face several challenges.

1. Offshore interconnectors

Offshore wind projects increasingly combine generation and transmission functions.

2. Hybrid interconnectors

A single asset may simultaneously connect two markets and transport offshore renewable electricity.

3. Storage

Battery storage can change congestion patterns by shifting electricity across time.

4. Hydrogen

Electricity-to-hydrogen projects can create new cross-border demand patterns.

5. Digital market coupling

Algorithms increasingly determine cross-border capacity allocation.

6. Cybersecurity

Market-coupling and interconnector-control systems create cybersecurity risks.

7. Climate change

Extreme weather can reduce transmission availability and increase congestion.

27. Conclusion

Interconnector congestion pricing and allocation rules form a central component of modern electricity-market law. They determine how scarce cross-border transmission capacity is allocated among competing market participants and how the resulting economic value is distributed.

The principal regulatory movement has been away from purely administrative or bilateral allocation toward transparent, market-based and increasingly implicit allocation mechanisms, particularly through market coupling.

The legal framework must nevertheless balance economic efficiency with:

non-discriminatory access;

competition;

system security;

consumer interests;

investment incentives;

renewable-energy integration; and

regulatory accountability.

The European cases, particularly Baltic Cable, Commission v Sweden, Commission v Germany, and Aquind, demonstrate how congestion regulation interacts with broader principles of EU electricity-market integration and regulatory governance. Indian jurisprudence, particularly PTC India Ltd. v CERC and Energy Watchdog v CERC, provides a comparative foundation for understanding the statutory limits and institutional role of electricity regulators.

Ultimately, the central legal question is not simply who pays for congestion, but how scarce network capacity can be allocated transparently, efficiently, securely and consistently with the governing electricity-law framework.