1. Introduction

Transmission pricing is not merely a mechanism for recovering the cost of electricity networks. It also influences where generation is built, where consumers locate, how much network capacity is constructed, and when investment takes place. Consequently, a transmission tariff can perform two functions simultaneously:

Cost recovery — ensuring that transmission-system operators recover efficiently incurred costs; and

Investment signalling — communicating the relative network costs and constraints associated with different locations and patterns of electricity use.

Investment signal distortion occurs when the design of transmission charges gives investors signals that do not correspond adequately to the underlying or expected costs of using and expanding the transmission system. This can result in generation being built in locations that require expensive network reinforcement, excessive transmission investment, congestion, stranded assets, or inadequate investment in strategically important areas.

The issue has become increasingly important with renewable-energy expansion, offshore wind, large-scale solar generation, battery storage, hydrogen production, electric vehicles and geographically concentrated data centres.

European electricity law expressly recognises the relationship between transmission charges and investment signals. Regulation 714/2009 stated that, where appropriate, network tariffs should provide locational signals and take account of losses, congestion and infrastructure investment costs. (EUR-Lex)

2. Meaning of Investment Signal Distortion

An investment signal is information conveyed by a price to an economic actor concerning the consequences of a future investment decision.

In transmission pricing, the signal may concern:

the cost of connecting at a particular location;

congestion in a particular region;

expected transmission losses;

availability of network capacity;

the need for future reinforcement;

reliability requirements;

the marginal cost imposed on the transmission system; and

the expected value of locating generation or demand at a particular point.

A distortion arises when the tariff does not adequately reflect these factors.

For example, suppose two regions have the following characteristics:

A uniform tariff may promote investment in Region B even though that investment could impose substantial additional system costs.

Conversely, excessively high locational charges can discourage investment in areas that are actually desirable from a long-term system-planning perspective.

Thus, both under-pricing and over-pricing can distort investment decisions.

3. How Transmission Pricing Creates Investment Signals

Transmission tariffs can generate signals through several mechanisms.

A. Locational signals

A locational tariff varies according to geographical location.

The basic principle is:

Higher network costs or greater network constraints should, where appropriate, be reflected in the price signal.

A generator located close to a major load centre may impose less incremental transmission cost than one located far from demand.

B. Time-based signals

Transmission charges can also vary according to time.

Peak-period charges may encourage consumers or storage facilities to reduce demand during network-stressed periods.

C. Congestion signals

Where transmission capacity is scarce, congestion pricing can signal the economic value of additional network capacity.

D. Loss-related signals

Electricity losses increase with the physical movement of electricity. Pricing that incorporates losses can therefore influence generation and demand location.

E. Connection charges

Connection policies determine how much of the cost of connecting a new user is borne directly by that user rather than socialised across network users.

The allocation of these costs can significantly influence investment location.

4. Major Forms of Investment Signal Distortion

4.1 Uniform Transmission Pricing

Uniform national transmission charges provide simplicity and can support broader objectives such as nationwide electricity-market integration.

However, they may obscure geographical differences in network costs.

For example:

Actual system cost:

Generator A → ₹10 million reinforcement cost
Generator B → ₹100 million reinforcement cost

If both face essentially the same transmission charge, the price does not communicate the difference in network consequences.

The resulting investment decision may therefore be economically inefficient from the perspective of total system cost.

At the same time, uniform pricing may be deliberately adopted for distributional or political reasons. Therefore, a difference between the tariff and marginal network cost is not automatically a legal error.

5. Distortion from Excessive Locational Pricing

The opposite problem is also possible.

If locational charges are excessively high, they may discourage investment in a region even where the investment would produce long-term system benefits.

This is particularly relevant to renewable energy.

For example, a renewable-resource-rich region may initially require substantial transmission investment. A tariff based heavily on existing congestion could discourage renewable investment precisely where large-scale renewable resources are available.

Consequently, regulators face a difficult question:

Should transmission prices reflect today's network conditions or the network configuration expected after future investment?

This is one of the central difficulties of investment-signal design.

6. Short-Term Prices versus Long-Term Investment Signals

Electricity systems operate on different time horizons.

A transmission tariff can accurately reflect short-run congestion but nevertheless provide a poor signal for long-term infrastructure investment.

For example:

A region becomes congested.

Transmission charges rise.

New generation investment is discouraged.

The regulator later constructs a major transmission line.

Congestion falls.

The previous price signal becomes obsolete.

Therefore, investment signals must often be designed using forward-looking network planning, not merely historical costs.

The European regulatory framework recognises this problem by linking network tariffs not only to actual costs but also to infrastructure investment and long-term system considerations. In Commission v Germany (Case C-771/18), the Court of Justice discussed the relevance of investment needs, efficiency incentives, network losses, congestion and the balance between generation and consumption in determining network charges. (EUR-Lex)

7. Transmission Pricing and Renewable-Energy Investment

The problem becomes especially significant with renewable generation.

Solar and wind resources are geographically concentrated. The best resource locations are often distant from major demand centres.

Consequently:

Renewable-resource location → transmission requirement → transmission pricing → investment signal

If transmission costs are heavily charged to renewable generators, investors may relocate projects or abandon economically attractive sites.

If those costs are heavily socialised, however, investors may have insufficient incentives to account for the network consequences of their location.

The appropriate regulatory objective is therefore not simply "low transmission charges" but efficient allocation of transmission costs while maintaining adequate incentives for system-compatible investment.

8. Transmission Pricing in India

In India, transmission pricing operates within the statutory framework of the Electricity Act, 2003, CERC regulations and related government policies.

Section 61 of the Electricity Act requires tariff regulations to be guided by principles including:

efficiency;

economy;

safeguarding consumer interests;

recovery of the cost of electricity in a reasonable manner;

incentives for efficiency;

promotion of competition;

and other statutory objectives.

Sections 62 and 63 provide different mechanisms for tariff determination and adoption, while Section 79 assigns important regulatory functions to CERC, including regulation and determination of inter-State transmission tariffs.

The Indian system has increasingly used competitive bidding for transmission projects alongside regulated tariff determination.

CERC's recent orders demonstrate the continuing use of both regulated transmission tariffs and tariff-based competitive bidding. (CERC)

9. PoC Mechanism and Investment Signals

India's Point of Connection (PoC) transmission-charge mechanism attempts to allocate inter-State transmission costs among users based on their contribution to the transmission system.

The underlying objective is more sophisticated than simply charging users according to physical distance.

This is important because electricity flows according to network physics rather than contractual paths alone.

A generator may therefore affect several parts of the transmission network even where it has no direct contractual relationship with a particular consumer.

A sophisticated transmission-pricing methodology attempts to capture these network effects.

Nevertheless, any model based on assumptions concerning network flows, future demand, generation dispatch and network topology can produce investment signals that differ from actual long-term system costs.

10. Case Law

10.1 VEMW and Others v Directeur van de Dienst uitvoering en toezicht energie, Case C-17/03

The Court of Justice of the European Union considered issues surrounding access to electricity transmission systems, non-discrimination and the transition to liberalised electricity markets. (EUR-Lex)

Relevance

The case demonstrates that transmission-system access cannot be designed solely around historical contractual arrangements. Regulatory arrangements must operate consistently with principles of:

non-discrimination;

market access;

legal certainty; and

the structure of the liberalised electricity market.

For investment-signal analysis, this is significant because discriminatory or preferential network-access arrangements can distort investment incentives between market participants.

10.2 Commission v Germany, Case C-771/18

This case is particularly relevant to transmission pricing.

The Court considered EU requirements concerning network charges and regulatory treatment of costs incurred by electricity and gas transmission-system operators.

The Court recognised that network-access charges are connected not only with operators' costs but also with:

investments necessary for network viability;

efficiency incentives;

market integration;

security of supply;

network losses;

congestion; and

infrastructure investment costs. (EUR-Lex)

Legal significance

The case illustrates an important principle:

Transmission pricing is not simply a mechanism for reimbursing historical expenditure; it forms part of the regulatory architecture through which network efficiency and investment are promoted.

This provides an important legal foundation for analysing investment-signal distortion.

10.3 Power Grid Corporation of India Ltd. v. Central Electricity Regulatory Commission

Indian appellate litigation concerning Power Grid's transmission assets has repeatedly addressed the relationship between tariff determination, capital expenditure and recovery of transmission investment.

In one important proceeding, Power Grid challenged the treatment of the date from which transmission assets became commercially operational and the resulting consequences for recovery of interest during construction and other costs. (Indian Kanoon)

Relevance to investment signals

Transmission investment is capital-intensive and typically recovered over long periods.

If regulatory treatment unnecessarily delays recovery of efficiently incurred expenditure, it can affect the expected return and therefore the incentive to undertake infrastructure investment.

Conversely, allowing inefficient or excessive expenditure to flow automatically into tariffs can produce a different distortion by weakening incentives for cost discipline.

Thus, tariff regulation must balance:

investment incentive + consumer protection + efficiency + cost recovery.

10.4 Power Grid Corporation of India Ltd. v. CERC — 2011

In another Power Grid case, the Appellate Tribunal considered capital-cost treatment and the regulatory methodology for determining transmission tariffs. The decision discussed the principle that admitted capital expenditure actually incurred, subject to regulatory scrutiny, forms the basis for tariff determination under the applicable regulations. (Indian Kanoon)

Relevance

This illustrates the importance of prudence review.

If all expenditure is automatically passed through to consumers, the transmission operator may have weak incentives to minimise costs.

If legitimate investment costs are systematically excluded, however, investment incentives can be weakened.

The regulatory challenge is therefore to establish a tariff that is:

sufficiently remunerative to attract efficient investment but sufficiently disciplined to prevent inefficient investment.

11. The Role of Prudence Review

Prudence review is an important mechanism for avoiding investment distortion.

The regulator may examine:

whether the project was necessary;

whether its capacity was justified;

whether procurement was efficient;

whether costs were reasonable;

whether delays were attributable to the transmission company;

whether alternative network solutions were available; and

whether the investment complied with applicable planning requirements.

This prevents a simple "build and automatically recover" model.

However, excessive regulatory uncertainty can itself distort investment.

If investors cannot predict whether efficiently incurred expenditure will be recognised in future tariffs, the regulatory risk premium may increase.

12. Regulatory Lag and Investment Distortion

Transmission networks require substantial upfront capital.

Suppose:

Investment = ₹1,000 crore

but regulatory approval of the associated tariff is delayed.

The investor may incur:

interest during construction;

financing costs;

inflationary costs;

opportunity costs; and

cash-flow pressure.

If the regulatory framework does not adequately address these costs, investment incentives may deteriorate.

Conversely, if regulatory rules guarantee returns regardless of performance, there may be incentives for excessive capital expenditure.

This creates the classic regulatory tension between:

under-investment risk and over-investment risk.

13. Stranded Investment

Poor transmission-price signals can also create stranded assets.

Consider the following sequence:

Transmission tariffs encourage generation development in Region A.

Numerous generators locate there.

Network congestion increases.

The regulator constructs substantial transmission capacity.

Market conditions subsequently change.

Generation projects retire or move.

The new transmission infrastructure becomes underutilised.

The resulting asset may be economically stranded.

Therefore, good transmission pricing should be coordinated with:

generation planning;

renewable-energy planning;

demand forecasts;

storage development;

interconnection planning; and

climate-transition policy.

14. Transmission Pricing and Storage

Battery and long-duration storage investments create an additional challenge.

A battery can:

consume electricity when the system is unconstrained;

discharge during congestion;

provide ancillary services;

reduce peak demand; and

defer network investment.

A rigid transmission tariff may treat storage simply as another consumer or generator.

That can produce double charging or other pricing distortions.

Appropriate tariff design therefore needs to consider the system value of flexible resources.

15. Offshore Transmission

Investment-signal distortion is particularly significant for offshore wind.

Offshore renewable generation often requires:

offshore substations;

export cables;

onshore reinforcement;

interconnection facilities.

If each project develops its own connection independently, the system may produce fragmented infrastructure.

A coordinated offshore transmission framework may instead permit:

multiple wind farms → shared offshore network → integrated transmission system

This can reduce duplication but requires regulatory rules concerning:

cost allocation;

ownership;

access;

connection rights;

congestion;

investment recovery; and

stranded-asset risk.

16. Dynamic Transmission Pricing

Traditional transmission pricing often relies on relatively stable tariff periods.

However, modern electricity systems are increasingly dynamic.

Factors such as:

renewable generation;

storage;

electric vehicles;

distributed energy resources;

data centres;

hydrogen production; and

demand response

can rapidly change network conditions.

Consequently, future tariff frameworks may increasingly incorporate:

time-of-use charges;

locational components;

congestion charges;

capacity charges;

dynamic connection prices; and

forward-looking network-cost signals.

Ofgem's 2026 work on locational charges illustrates this contemporary regulatory debate. Its consultation considers reforms intended to provide investment signals concerning locations aligned with longer-term electricity-system requirements. (Ofgem)

17. Legal Principles Governing Efficient Transmission Pricing

Several legal principles are particularly relevant.

17.1 Non-discrimination

Comparable users should not receive unjustifiably different treatment.

17.2 Transparency

Market participants should understand how transmission charges are calculated.

17.3 Cost reflectivity

Charges should, where appropriate, reflect efficiently incurred system costs.

17.4 Regulatory certainty

Investors require predictable rules concerning cost recovery.

17.5 Proportionality

Charges should not impose burdens disproportionate to legitimate regulatory objectives.

17.6 Efficiency

Tariff design should encourage efficient use and development of transmission infrastructure.

17.7 Consumer protection

Investment incentives cannot be separated from the obligation to prevent unreasonable consumer costs.

18. The Central Regulatory Dilemma

The fundamental problem can be expressed as:

Too little locational differentiation

→ weak investment signals
→ excessive network reinforcement
→ congestion
→ inefficient generation location.

But:

Too much locational differentiation

→ excessive investor uncertainty
→ discouragement of strategically valuable investment
→ increased regional disparities
→ potentially inefficient market fragmentation.

Therefore, transmission pricing should not necessarily attempt to reproduce every marginal network cost.

Instead, regulators must determine the appropriate degree of price differentiation for the regulatory objectives of the electricity system.

19. Future Legal Challenges

The transition to a net-zero electricity system will intensify these questions.

Future disputes are likely to concern:

Who should pay for anticipatory transmission investment?

Should future renewable generation be incorporated into tariff calculations?

How should transmission costs be allocated between generators and consumers?

How should storage be classified for network charging?

Should large electricity consumers such as data centres receive location-based charges?

How should offshore transmission investment be socialised?

How should stranded transmission assets be treated?

How much regulatory discretion should transmission regulators possess?

These questions demonstrate that transmission pricing is increasingly becoming a question of long-term infrastructure governance, rather than simply tariff accounting.

20. Conclusion

Investment signal distortion in transmission pricing occurs when network charges fail to communicate appropriately the economic consequences of locating generation, demand or storage at particular points in the electricity system.

The problem has several dimensions:

locational distortion;

temporal distortion;

congestion distortion;

cost-recovery distortion;

regulatory-risk distortion; and

anticipatory-investment distortion.

The case law demonstrates that transmission regulation must balance investment incentives with non-discrimination, market integration, efficiency, consumer protection and regulatory certainty. VEMW illustrates the importance of non-discriminatory network access, while Commission v Germany (C-771/18) demonstrates the legal relevance of infrastructure investment, congestion, losses and regulatory incentives in network-charge design. (EUR-Lex)

In India, the Electricity Act, CERC tariff regulations, PoC-based transmission charging, competitive transmission procurement and judicial review collectively create the framework within which these investment signals operate. CERC's continuing transmission-tariff and competitive-bidding proceedings show the practical importance of these mechanisms. (CERC)

Ultimately, an effective transmission-pricing framework should seek to achieve a carefully balanced objective:

transmission charges should recover efficiently incurred network costs, protect consumers, maintain regulatory certainty, and provide sufficiently accurate long-term signals for generation, demand, storage and network investment without unnecessarily obstructing economically valuable investment.

This makes investment-signal design a central component of modern electricity-market and energy-transition law, rather than merely a technical question of tariff calculation.