Merit order
The ranking of power plants by ascending marginal cost, used to dispatch the cheapest units first and set the market clearing price.
The merit order is the supply curve of an electricity market: generators are stacked from lowest to highest short-run marginal cost (fuel, carbon and variable O&M), and dispatched in that order until demand is met. In a uniform-price (pay-as-clear) auction, the last unit needed sets the price paid to all accepted generators.
A typical European stack, from cheapest to most expensive: wind, solar and run-of-river (near zero marginal cost), nuclear (about 5 to 10 EUR/MWh fuel), lignite, hard coal, combined-cycle gas, open-cycle gas and oil. The short-run cost of gas units can be estimated as:
For a CCGT at 55% efficiency with gas at 35 EUR/MWhth and EU ETS carbon at 70 EUR/t (0.2 t CO₂/MWhth), SRMC is about 64 + 25 + 3 ≈ 92 EUR/MWh.
The merit-order effect describes how adding zero-marginal-cost renewables shifts the curve right, displacing expensive plants and lowering wholesale prices. Studies for Germany estimated reductions of roughly 5 to 10 EUR/MWh in the 2010s. During the 2022 gas crisis, gas frequently set the marginal price, transmitting fuel costs to all power, which sparked EU debate on market design reform. See also negative prices.
Related terms
All terms →- Day-ahead market
A wholesale electricity auction held the day before delivery that sets hourly or quarter-hourly prices and schedules for the following day.
- Negative electricity prices
Wholesale prices below zero, when generators pay to deliver power because inflexible supply exceeds demand.
- Carbon price
A cost applied per tonne of CO2e emitted, through a carbon tax or an emissions trading system, so that the climate damage of emissions enters market prices.
- Dispatchable generation
Generation whose output can be scheduled, raised or lowered on request by the operator, independently of weather.
- Heat rate
The fuel energy a thermal power plant consumes per kWh of electricity generated; the inverse of efficiency, usually in BTU/kWh or kJ/kWh.
- OPEX
Operating expenditure: recurring costs to run and maintain an energy asset, split into fixed costs per kW-year and variable costs per MWh.