ZONAL PRICE FORMATION EFFICIENCY EVALUATION

Meaning and Concept

Zonal price formation is an electricity-market pricing mechanism under which the power system is divided into geographical pricing zones, with electricity prices determined separately for each zone. The price in each zone reflects generation offers, demand, available transmission capacity, congestion and, depending on the market design, network losses. Where transmission between zones becomes constrained, prices may diverge. Zones with abundant low-cost generation may experience lower prices, while constrained importing zones may face higher prices.

For South Africa, zonal pricing is relevant to the development of the South African Wholesale Electricity Market (SAWEM), particularly as increased renewable generation and competitive electricity trading create greater demands on the transmission network.

South African Legal Framework

The Electricity Regulation Act 4 of 2006, as amended by the Electricity Regulation Amendment Act 38 of 2024, provides the statutory framework for competitive electricity trading. The amendments establish market-operation functions and require an open, transparent and non-discriminatory electricity-trading platform. They also require the market operator to develop a Market Code and associated rules.

The National Transmission Company South Africa’s SAWEM Market Code, Revision 2.3 of February 2026, seeks efficient and economic market operation, competition, transparency, non-discrimination and protection of consumers' interests concerning price, quality, reliability and security of supply.

These principles provide the legal and economic basis against which any future zonal pricing arrangement would have to be evaluated.

Efficiency Evaluation

The first criterion is allocative efficiency. Prices should encourage electricity to be generated and consumed where doing so minimises overall system costs. Price differences between zones can reveal where transmission congestion makes additional electricity supply expensive.

The second consideration is congestion management. If electricity flows repeatedly encounter transmission constraints, zonal price differences may signal where new transmission infrastructure, storage or generation investment is required.

Third, regulators must evaluate investment signals. Persistently high prices in a constrained zone may encourage generators, batteries and demand-response resources to locate there. Conversely, low-price zones may indicate excess generation relative to available transmission capacity.

Fourth, evaluation must consider consumer impacts and distributional fairness. Efficient wholesale pricing can nevertheless expose customers in transmission-constrained regions to materially higher prices. Market efficiency must therefore be considered alongside affordability, equality and lawful tariff design.

Finally, pricing zones must accurately represent actual network constraints. Excessively large zones may conceal congestion, while excessive fragmentation may increase complexity, market volatility and opportunities for strategic bidding.

Case Law

Case Name/Citation: Casting, Forging and Machining Cluster of South Africa (NPC) and Others v National Energy Regulator of SA and Others (92792/2019) [2022] ZAGPPHC 927

Facts: Industrial electricity customers challenged NERSA's approval of City Power electricity tariffs, arguing that the methodology did not adequately reflect the actual costs of supplying different categories of customers.

Legal Issue: Whether NERSA's tariff determination complied with the Electricity Regulation Act and requirements of rational, cost-reflective regulation.

Judgment: The High Court found the tariff decision unlawful and set it aside.

Legal Principle/Ratio: Electricity pricing decisions must have a rational relationship to relevant supply costs and statutory pricing requirements. Failure to consider necessary cost information can constitute procedural and substantive irrationality.

Significance: The case is highly relevant to zonal pricing because geographical price differences should be supported by demonstrable network costs, congestion or other legitimate economic factors rather than arbitrary boundaries.

Case Name/Citation: AfriForum NPC v National Energy Regulator of South Africa and Others (2024/061993) [2024] ZAGPPHC 638

Facts: AfriForum challenged NERSA's methodology for approving municipal electricity tariff increases, particularly the absence of adequate cost-of-supply studies.

Legal Issue: Whether tariffs could lawfully be approved without sufficient evidence establishing the underlying costs of electricity supply.

Judgment: The Court held that NERSA's methodology was legally defective and emphasised the statutory importance of cost-of-supply information.

Legal Principle/Ratio: Electricity tariff methodologies must be evidence-based, rational and consistent with statutory cost-reflectivity requirements.

Significance: If South Africa adopts zonal pricing, NERSA and the market operator would need credible transmission, congestion and market data to justify both zone boundaries and resulting price differences.

Conclusion

Zonal Price Formation Efficiency Evaluation therefore examines whether geographical electricity prices accurately reveal congestion, scarcity and system costs while promoting efficient dispatch and investment. Under South African law, any such methodology must remain transparent, non-discriminatory, evidence-based and rationally connected to legitimate electricity-system costs, while also considering reliability, affordability and consumer protection.