Merit order

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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[edit]

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[citation needed] bidding system, the electricity pool, in 1990.

The effect of renewable energy on merit order[edit]

The high demand for electricity during peak demand pushes up the bidding price for electricity, and the relatively inexpensive baseload power supply mix is supplemented by ‘peaking power plants,' which charge a premium for their electricity.

Increasing the supply of renewable energy tends to lower the average price per unit of electricity because wind energy and solar energy have very low marginal costs: they do not have to pay for fuel, and the sole contributor to their marginal cost is operational cost. As a result, their electricity is less costly than that from coal or natural gas, and transmission companies buy from them first.[1][2] Moreover, solar energy is typically most abundant in the middle of the day, coinciding closely with peak demand, so that it is in the best position to displace coal and natural gas electricity when those sources are charging the highest premium. Solar and wind electricity therefore substantially reduce the amount of highly priced peak electricity that transmission companies need to buy, reducing the overall cost. A study by the Fraunhofer Institute found that this "merit order effect" had allowed solar power to reduce the price of electricity on the German energy exchange by 10% on average, and by as much as 40% in the early afternoon, in 2007; as more solar electricity is fed into the grid, peak prices will come down even further.[2] By 2006, the "merit order effect" meant that the savings in electricity costs to German consumers more than offset for the support payments paid for renewable electricity generation.[2]

The effect of intermittency on merit order[edit]

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. On the other hand, solar energy tends to be most abundant during peak energy demand, maximizing its ability to displace coal and natural gas power.

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.[3][4] On the other hand renewable energy in Germany increased the price for electricity, consumers there now pay 52.8 €/MWh more only for renewable energy (see German Renewable Energy Act), average price for electricity in Germany now is increased to 26 €ct./KWh.

As a merit order ( English for order of performance / of Merit ) refers to the sequence of use of the power plants . This is determined by the marginal cost of electricity determined.

Merit Order of the German conventional power plants in 2008, Source Research Institute for Energy eV Starting with the lowest marginal cost power plants while switched with higher marginal costs until demand is met. At the current market determines the final bid, which still receives a supplement, the electricity price (market clearing price). The price of electricity is thus determined by the most expensive power plant, which is still needed to meet the current demand. Table of Contents [ Hide ] 1 Merit-order effect 2 effects 3 Criticism 4 Literature 5 sources Merit-order effect [ Edit ]

The merit-order effect is the displacement of expensive production plants by the market entry of a power plant with lower marginal costs, e.g. by the injection of such a power plant to the grid. According to the regulation compensation mechanism is in Germany after the EEG (electricity from wind, water, solar energy, biomass, etc.) current applied since 2010 by the transmission system operators (TSOs) on the spot market ( EEX ) markets [1] . Prior to 2010, the TSOs had to refine the fluctuating EEG electricity amounts to a power strip and were also active on the electricity market. In times of high EEG electricity feeding the EEG electricity displaces electricity from the most expensive conventional power plants and thus lowers the merit-order effect of the market price. However, to be paid by the domestic electricity customers EEG apportionment increased the total price for electricity, so that the total EEG levy rate (currently 5.277 cents / kWh) charged consumers (residential, commercial and some industrial consumers) totaling more for pay electricity.

Merit-order effect[edit]

Seems noon (at peak times) much sun, then displaces the electricity from photovoltaic systems often expensive oil or gas power plants. This eliminates the current price. The wind power displaces large amounts of conventional power plants and can be cheaper than the merit-order effect of the current shopping in stores. This was in 2006, to an extent the case that an average price reduction of € 7.83 per megawatt hour was effected, as a study [2] of the Fraunhofer ISI shows. A major factor for this was the high fuel prices (particularly gas). This study assumes that injections of current can be accurately predicted from renewable energy sources [3] and that of all the electricity needed is the power exchange [4] . A study [5] of the Research Institute for Energy has a price reduction effect of 2.4 (€ / MWh) / GW REG from. With an average supply of 4.6 GW of wind power results in an average reduction in electricity price of 11.0 € / MWh. However, the current more expensive at the same time by the EEG apportionment, since 2013 this is € 52.8 / MWh, already in 2012 a total of about 20 billion have been paid extra € / year for EE, the next few years is expected to increase. The graph illustrates the effect of the effect. The aggregate supply function (blue) is formed from the dictates of individual electricity providers and generally corresponds to their marginal cost . Demand (green) is inelastic and is first satisfied from the sources to the EEG, so that only the residual demand - the so-called residual load - is supported by the conventional power generators, the most expensive not come into play and so determined electricity price to Ap decreases. In this way, renewable energy to reduce the electricity price in the stock market, because expensive peak load power plants are increasingly rare, the price-determining power plant on the market, but power plants with lower marginal costs. Thus, the reduced contribution of the low base load power plants such as hydroelectric, nuclear and lignite-fired power plants, which are now at p 2 generate less profit than p 1 . The merit-order effect can thus reduce the market price for electricity at the expense of the power plant operators. A net reduction to the consumer may arise, even if the remuneration of the EEG over the price level p 1 is, if caused by the merit-order effect output reduction for conventional power (p 1 -p 2 ) * N 2 is bigger than spending on electricity from renewable sources (N 1 -N 2 ) * (pEEG-p 1 ). In this case, the slope of the merit order curve (p 1 -p 2 ) / (N 1 -N 2 ) at high load quite steep and the price of EEG power p EEG is relatively little about the stock market price level p 1 such as on some winter days with moderate wind returns. In addition to the energy exchange of the merit-order effect always occurs where commodities are traded, i.e. goods with identical properties ( "fungible" ). This concerns, for example, the physical trading of crude oil, as the production costs of the last required to meet demand oil source, the cost of the marginal barrel, determine the price. However, in contrast to the current shelf life of the oil plays an additional role. Effects [ Edit ]

This section needs to be revised: development since 2006 is not clearly presented. Help us to him improve, and then remove this tag. Overall, the current prices on the electricity market are EPEX kWh since 2000 (entry into force of the EEG Act) by approximately 100% from approximately 2 ct / kWh to about 4 cents / increased [6] [7], a fall in prices that (about 6 cents / kWh to 2008 to now 4 ct) but it is largely a function of the excess supply of coal on the world market return, caused by substitution of the United States from coal to shale gas. [8] About the merit order effect decreases so that the price of electricity normally. The EEG apportionment in 2013 rose to 5.28 cents / kWh. Overall, the German electricity price is the second highest in Europe. [9] The "Federal Ministry for the Environment, Nature Conservation and Nuclear Safety," presented in 2007 firmly on the other hand, the cost savings over the merit-order effect of renewable energies lie in Germany after the review [10] of the Federal Ministry for the Environment in 2006 at € 5.0 billion and thus the additional cost of € 3.3 billion compared to conventional power generation. The model calculation for the calculation of the merit-order effect of the EEG power generation for 2006 can be found in one study [2] of the Fraunhofer Institute for Systems and Innovation Research (ISI, Karlsruhe). Here were distinguished on the electricity market the market value effect, the CO 2 and effect the merit order effect. "If you look at the market value of renewable energy and the specific volume in the study of the merit-order effect together, there is a significant reduction caused by the Renewable Energy Sources Act costs. For 2006, the sum of market value and merit-order effect is even higher than the total EEG compensation sum. " [11] In 2010, a study at the TU Berlin's [12] of savings in the order of an average of 8 Eur / MWh from. Would result in the sum of € 2,010 for the year 1.78 billion. Medium to long term could adjust depending on the future development of both a positive as well as negative merit-order effect. According to calculations by the Fraunhofer Institute for Systems and Innovation Research (ISI, Karlsruhe) on behalf of the BMU, lowers the Renewable Energy Law of the current market price of about 0.6 cents / kWh. Thus, the renewable energy and the further expansion have a strong price-dampening effect on the market prices for electricity. Based on the total German electricity consumption this results in a relief effect of EUR 2.8 billion for 2009. The study concludes that in energy-intensive enterprises discharge effect by the merit-order effect of the additional cost by the EEG and thus exceeds a net reduction is achieved. For the remaining electricity customers the additional costs of excess EEG, however, a possible reduction effect itself (levy of 3.5 cents per kWh in 2011), when the merit-order effect in the full amount would be beneficial to the client. [13] In December 2011, fell the spot market prices on the electricity market due to the extremely high production of electricity from wind power by 22% compared with the previous month and were thus at the level of August 2010. [14] Criticism [ Edit ]

In a working paper of the Institute of Energy Economics at the University of Cologne (EWI) [15] is criticized that the merit-order model is appropriate for the calculation of short-term effects, but not for the calculation of long-term effects, because by renewable energy term, the composition the supply of conventional power plants change. In addition, there is criticism that the model assume that all electricity produced will traded on an exchange, but what actually is the case for only a small part. Thus the need for the e.g. Renewable Energy Sources Act current fed by the network operators also then be taken to the conditions laid down in this Act payment rates if the market price is much lower and is sometimes even negative [16] . And the Research Institute for Energy (FfE) [5] emphasized that it was to short-term price effects. With increased use of renewable energy to the power plant to fit. This then follows a new merit order. It is pointed out that the merit-order effect is not directly reducing the electricity costs because the high investment costs for power generation plants from renewable sources were not considered here. The lower stock prices in turn require higher EEG differential costs. A higher EEG apportionment for the final consumer. Gives [17] However, since both exchange rates and EEG surcharge is ultimately paid by the final consumer, the price of electricity in the long term for the consumer in the end the same. The consumer has long-term contracts and pays for both current and for the EEG apportionment in the contract period the same amount. Medium to long term it is expected that the current pricing of merit order must be completed. With an income, which is based solely on the delivered work, the incentive for building and maintaining of reserve capacity with low load factors is missing. Therefore, the design of capacity markets [18] thought that similar performance-based compensation to the balancing energy market offers.


  1. ^ William Blyth, Ming Yang, Richard A. Bradley, International Energy Agency (2007). Climate policy uncertainty and investment risk : in support of the G8 plan of action. Paris: OECD Publishing. p. 47. ISBN 9789264030145. Retrieved 24 December 2012. 
  2. ^ a b c Frank Sensfuß, Mario Ragwitz, Massimo Genoese (2007). The Merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany. Working Paper Sustainability and Innovation No. S 7/2007. Karlsruhe: Fraunhofer Institute for Systems and Innovation Research (Fraunhofer ISI). 
  3. ^ 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. 
  4. ^ 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. 

Literature [ Edit ]

Jürgen Neubarth, Oliver Woll, Christoph Weber, Michael accessible: . influence the spot market prices by wind power generation energy Tagesfragen, Vol 56 Issue 7, 2006, pp. 42–45. Sven Bode, Helmuth Groscurth: The Effect of the EEG on the "current price". (PDF, 196 kB) HWWA Discussion Paper 348: Hamburg, August 2006. Serafin von Roon, Malte Huck: merit order of the power plant. (PDF, 663 kB) Research Institute for Energy eV: Munich, June 2010. Federal Ministry for the Environment: Renewable energy sources in figures - national and international development . BMU: Berlin, November 2007, p 27 (PDF file, 6.26 MB) Sources [ Edit ]

↑ Bernd Wenzel, Jochen Diekmann: Determination nationwide, average power purchase cost of electricity supply companies. - Comparative presentation of known approaches and development of alternatives on the basis of market data for the calculation of EEG differential costs. onto the website of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. September 2006. ↑ a b Frank Sensfuß, Mario Ragwitz: . analysis of the price effect of renewable electricity generation on the German electricity market prices (PDF, 989 kB) on the website . Federal Ministry for the Environment, Nature Conservation and Nuclear Safety 18 June 2007. ↑ Frank Sensfuß, Mario Ragwitz: . analysis of the price effect of renewable electricity generation on the German electricity market prices (PDF, 989 kB) on the website . Federal Ministry for the Environment, Nature Conservation and Nuclear Safety 18 June 2007, p 5 ↑ Frank Sensfuß, Mario Ragwitz: . analysis of the price effect of renewable electricity generation on the German electricity market prices (PDF, 989 kB) on the website . Federal Ministry for the Environment, Nature Conservation and Nuclear Safety 18 June 2007, p 7 ↑ a b Serafin von Roon, Malte Huck: . merit order of the power plant (PDF, 663 kB) on the website . Centre for Research in Energy June 2010. ↑ ↑ . Progress Report 2007 on the Renewable Energy Sources Act (PDF, 2.0 MB) on the website of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. ↑ Frank Sensfuß, Mario Ragwitz: . analysis of the price effect of renewable electricity generation on the German electricity market prices (PDF, 989 kB) on the website . Federal Ministry for the Environment, Nature Conservation and Nuclear Safety 18 June 2007, p 16 ↑ Georg Erdmann costs of the expansion of renewable energies (PDF, 928 kB), Study Association on behalf of the Bavarian Business Association, Munich, 2011. ↑ study by the Fraunhofer ISI (PDF, 572 kB) ↑ electricity prices fall due to wind power in December 2011 year low . Accessed on 10 January 2012. ↑ Ralf knowledge, Marco Nicolosi notes the current discussion on the merit order effect of renewable energy. (PDF, 655 kB) on the website of the Institute of Energy Economics at the University of Cologne. September 2007. (EWI Working Paper, No. 07/3). ↑ Andreas Mihm: consumers pay for excess supply of green electricity. In: FAZ. 10 December 2009. ↑ Bernd Wenzel, Joachim Nitsch . long-term scenarios and strategies for the development of renewable energy sources in Germany in the light of developments in Europe and globally (PDF, 1.2 MB) June 2010, p 22 (Study commissioned by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety) ↑ Oliver Kopp: Capacity Markets: Power Trading in the new design (PDF, 444 kB), keynote speech on the technical discussion "New energy, new market" Alliance '90 / The Greens, Berlin, 27 October 2010.