ZERO MARGINAL COST ELECTRICITY GOVERNANCE MODELS

Introduction

Zero marginal cost electricity refers primarily to electricity generated from technologies such as solar photovoltaic and wind power, where the additional operating cost of producing one extra unit of electricity is extremely low once the facility has been constructed. Unlike coal or gas generation, these technologies generally require no continuing fuel purchase for each additional megawatt-hour.

Large-scale penetration of zero-marginal-cost generation creates important regulatory challenges. Traditional electricity markets often determine wholesale prices through marginal-cost pricing, under which the price is determined by the most expensive generator required to satisfy demand. Where large volumes of renewable electricity enter the market at very low marginal cost, wholesale prices may fall significantly and may sometimes become zero or negative. Governance models must therefore reconcile affordable electricity with investment incentives, system reliability, network expansion and fair competition.

South African Regulatory Framework

South Africa is moving toward a more competitive electricity-market structure under the Electricity Regulation Amendment Act 38 of 2024, which commenced on 1 January 2025. The legislation establishes the framework for an open market platform, competitive electricity trading and an independent Transmission System Operator.

Under sections 34A and 34B, the Transmission System Operator's functions include transmission, system operation, market operation and central purchasing. The market operator must maintain a transparent and non-discriminatory trading platform, while the transmitter must provide non-discriminatory third-party network access.

These provisions are particularly important where renewable generators with very low marginal costs increasingly compete with conventional generation.

Governance Models

A marginal-pricing model allows generators to bid electricity according to operating costs, with the marginal unit normally establishing the market-clearing price. Wind and solar generators can therefore bid at or near zero while still receiving the market-clearing price.

A contract-based model, including power-purchase agreements and contracts for difference, provides predictable revenue independently of short-term wholesale prices. Such arrangements can prevent declining market prices from undermining financing of capital-intensive renewable facilities.

A capacity-market or reliability-payment model separates payment for electricity from payment for maintaining generation capacity. This is significant because even a system dominated by inexpensive renewable electricity requires dispatchable generation, storage or demand-response capacity during periods when renewable output is unavailable.

Regulators may also introduce scarcity pricing, ancillary-service markets and curtailment rules to compensate resources providing flexibility, frequency control, reserve capacity and other services that energy-only prices may not adequately reward.

Case Law

Competition Commission v Senwes Ltd [2009] ZACT 8

Facts: Senwes operated grain-storage facilities while simultaneously participating in downstream grain trading. Independent traders depended upon its storage infrastructure.

Legal Issue: Whether a vertically integrated dominant undertaking could use control of an essential upstream input to disadvantage downstream competitors.

Judgment: The Competition Tribunal concluded that differential charging arrangements constituted exclusionary conduct by allowing Senwes to raise competitors' costs.

Legal Principle/Ratio: A dominant vertically integrated firm may infringe competition law where control over an essential input is used to make efficient competitors economically unviable.

Significance: The principle is relevant to zero-marginal-cost electricity markets because renewable generators require fair transmission access. Network owners or market operators must not discriminate between affiliated and independent generators.

Competition Commission v Senwes Ltd [2012] ZACC 6

Facts: The dispute reached the Constitutional Court after disagreement concerning whether the Competition Tribunal had been entitled to determine the exclusionary conduct complained of.

Legal Issue: Whether the Tribunal possessed jurisdiction to determine conduct falling within the referred competition complaint.

Judgment: The Constitutional Court held that the referral was sufficiently broad to encompass the section 8(c) exclusionary-conduct complaint, although the order was modified to remove the specific description of the conduct as “margin squeeze.”

Legal Principle/Ratio: Competition adjudication must focus on the substance of properly referred exclusionary conduct while respecting statutory procedural requirements.

Significance: Competitive electricity-market governance similarly requires both effective anti-exclusion rules and lawful regulatory procedures.

Competition Commission v Telkom SA Ltd [2011] ZACT 2

Facts: Telkom controlled essential telecommunications infrastructure while competing with firms that required access to that infrastructure.

Legal Issue: Whether differential upstream pricing by a vertically integrated dominant firm could economically exclude efficient downstream rivals.

Judgment: The Tribunal explained that margin squeeze may arise where a dominant vertically integrated undertaking controls an essential input and its pricing makes efficient downstream competition uneconomic without objective justification.

Legal Principle/Ratio: Essential infrastructure must not be used strategically to foreclose competition.

Significance: The principle supports transparent grid-access, connection and transmission-pricing rules for renewable generators.

Conclusion

Zero-marginal-cost electricity does not mean that the electricity system itself has zero cost. Renewable plants still require substantial capital investment, transmission infrastructure, balancing services, storage and reliability resources. Effective governance therefore combines competitive energy pricing with capacity remuneration, network regulation, ancillary-service markets and non-discriminatory grid access. South Africa's emerging competitive-market framework provides the legal foundation for managing these challenges as renewable penetration increases.