Congestion Pricing Mechanisms in Electricity Networks

1. Introduction

Congestion pricing mechanisms are economic and regulatory tools used to manage scarce transmission capacity in electricity networks. Congestion occurs when the amount of electricity that users want to transmit is greater than the safe capacity of a transmission line, transformer, substation or interconnector.

Because electricity cannot normally be stored in unlimited quantities and must be balanced continuously, congestion cannot be solved only by allowing more electricity transactions. The system operator must determine how scarce network capacity should be allocated and how the resulting costs should be recovered.

Congestion pricing therefore connects electricity markets, transmission planning, tariff regulation and grid reliability.

2. Why Congestion Pricing Is Necessary

Suppose a renewable-energy zone produces very cheap electricity, but the transmission line connecting it to a large city is already operating close to its technical limit. Additional electricity cannot safely be transmitted.

Without an appropriate pricing mechanism, market participants may have little economic information about this scarcity.

Congestion pricing can:

allocate scarce network capacity;

reflect the economic cost of transmission constraints;

encourage efficient electricity generation;

encourage demand response;

support investment in transmission infrastructure; and

reduce unnecessary use of congested network routes.

3. Major Congestion Pricing Mechanisms

A. Locational Marginal Pricing

Locational Marginal Pricing (LMP) calculates electricity prices according to location. The price at a particular point can reflect the cost of supplying an additional unit of electricity while respecting transmission constraints.

When the network is uncongested, prices at different locations may be similar. When congestion occurs, prices can separate.

B. Congestion Charges

A specific charge may be imposed for using scarce transmission capacity. The charge can reflect the cost created by congestion or the value of limited network capacity.

C. Transmission Rights

Financial or physical transmission rights can provide users with protection against congestion-related price differences. Such instruments can also provide greater certainty to market participants.

D. Redispatch and Curtailment

Where pricing alone cannot manage congestion, the system operator may reduce the output of some generators and increase the output of others. Renewable generators may also be curtailed where necessary to maintain system security.

E. Network-Expansion Signals

Persistent congestion can indicate that new transmission infrastructure is economically justified. Congestion prices can therefore provide information for long-term investment decisions.

4. South African Legal Framework

South Africa does not currently have a comprehensive LMP-based congestion-pricing system comparable with some international electricity markets. Electricity pricing is primarily regulated through the Electricity Regulation Act 4 of 2006 (ERA), NERSA's licensing powers, tariff methodologies and the Grid Code.

Section 15 of the ERA establishes important tariff principles. Tariffs must allow an efficient licensee to recover the full costs of its licensed activities, including a reasonable return; promote technical and economic efficiency; provide users with information about costs; and avoid undue discrimination between customer categories.

These principles are highly relevant to any future congestion-pricing mechanism.

5. Relevant Case Laws

Eskom Holdings v Lekwa Ratepayers Association (2022)

The Supreme Court of Appeal confirmed that electricity generation, transmission and distribution are regulated under the ERA and that NERSA is the statutory regulator.

The case is relevant because congestion charges cannot simply be introduced as private commercial charges. They must operate within the statutory electricity-regulation framework.

Eskom Holdings v Vaal River Development Association (2022)

The Constitutional Court emphasised the relationship between Eskom's electricity-supply responsibilities and its financial responsibilities. It discussed NERSA's Multi-Year Price Determination Methodology, which is based on cost of service and includes incentives for efficiency and prudent procurement.

This provides an important principle for congestion pricing: electricity-network pricing must consider both system sustainability and efficient costs.

United Democratic Movement v Eskom (2023)

The High Court considered Eskom's electricity crisis and NERSA's tariff determinations. The judgment explained that the ERA's tariff principles require recovery of prudent costs while promoting technical and economic efficiency and avoiding undue discrimination.

Although the case did not directly decide congestion pricing, these statutory principles are directly relevant to designing congestion charges.

AfriForum v NERSA (2025)

In AfriForum NPC v NERSA, the High Court considered municipal electricity tariffs and found NERSA's 2025/26 public-participation implementation invalid. The judgment emphasised that tariff applications and approvals must be based on appropriate cost-of-supply information and that meaningful public participation is important.

This is particularly important for congestion pricing because any new transmission-pricing methodology would affect electricity users and therefore require a transparent and legally valid regulatory process.

6. Legal Challenges

Congestion pricing raises several legal questions.

First, fairness: charges should not arbitrarily discriminate between comparable electricity users.

Second, transparency: market participants should understand how congestion costs are calculated.

Third, regulatory authority: NERSA or another legally authorised institution must have a proper statutory basis for approving the pricing mechanism.

Fourth, grid reliability: economic pricing cannot override technical requirements necessary to protect the electricity system.

Fifth, consumer protection: congestion charges should not become an unjustified method of transferring inefficient costs to consumers.

7. Future Importance

Congestion pricing will become increasingly important as South Africa develops renewable generation, battery storage, wheeling arrangements, independent power producers and decentralised electricity systems.

A future framework could combine cost-reflective transmission charges, locational signals, transparent capacity allocation, congestion forecasting and transmission investment planning.

However, pricing should remain subordinate to grid-security requirements and should operate under clear regulatory oversight.

Conclusion

Congestion pricing mechanisms provide a way to manage scarce transmission capacity while creating economic signals for electricity producers, consumers and network investors. Possible mechanisms include locational pricing, congestion charges, transmission rights, redispatch and network-investment signals.

South African courts have not yet established a specific doctrine of congestion pricing. Nevertheless, Eskom v Lekwa Ratepayers Association, Vaal River Development Association, United Democratic Movement v Eskom, and AfriForum v NERSA establish important principles concerning regulatory authority, cost recovery, efficiency, non-discrimination, transparency and public participation. These principles provide a foundation for developing future congestion-pricing mechanisms within South Africa's evolving electricity market.