Merit Order

For other uses see Order of Merit (disambiguation)

The merit order is a way of ranking available sources of energy, especially electrical generation, in ascending order of their short-run marginal costs of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line.

The merit order in the British electricity market

The merit order was the method used in the electricity market of Great Britain when electrical power generation was the responsibility of a single integrated utility (the CEGB). After privatisation of the sector this was replaced by a more complex bidding system, the electricity pool, in 1990

The effect of renewable energy on merit order

Increasing the amount of renewable energy on sale lowers the average price per unit of electricity because of the merit order effect. This is because it counteracts the effects of peak demand.

The price that UK consumers pay for electricity is the spot price at peak demand. In times of high demand, when the energy produced by every plant is being used the supply is topped up by ‘peaker demand’ plants. These emergency plants charge a premium for their electricity.

Wind energy has no marginal costs [wind energy producers don’t need to buy combustion fuel] so their electricity is the cheapest and transmission companies buy from them first. Having a supply of very cheap wind electricity substantially reduces the amount of highly priced peak electricity that transmission companies need to buy and thus reduces the overall cost.

The effect of intermittency on merit order

The zero marginal cost of wind energy does not, however, translate, into zero marginal cost of peak load electricity in a competitive open electricity market system as wind supply cannot be dispatched to meet peak demand. The purpose of the merit order was to enable the lowest net cost electricity to be dispatched first thus minimising overall electricity system costs to consumers. Intermittent wind might be able to supply this economic function provided peak wind supply and peak demand coincide both in time and quantity. At other times, or under other circumstances, the zero marginal cost of wind energy does not apply. In general terms, the argument does not apply anyway as the marginal cost of wind power is never net zero as the Capital and Operational costs have to amortised by revenue from winds power sales.

A study by the Fraunhofer Institute in Karlsruhe, Germany found that windpower saves German consumers 5bn euros a year. It is estimated to have lowered prices in European countries with high wind generation by between 3 and 23 euros per megawatt hour...^[1][2]

1. ^ Helm, Dieter; Powell, Andrew (1992). "Pool Prices, Contracts and Regulation in the British Electricity Supply Industry". Fiscal Studies 13 (1): 89–105. doi:10.1111/j.1475-5890.1992.tb00501.x. 
2. ^ Sensfuss, Frank; Ragwitz, Mario (2008). "The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany". Energy Policy 36 (8 ( August)): 3076–3084. doi:http://ideas.repec.org/a/eee/enepol/v36y2008i8p3076-3084.html.