Merit Order
Encyclopedia
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 cost
s 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.
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 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.
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...
Order of Merit (disambiguation)
Order of Merit may refer to:Extant national orders:* Order of Merit of Antigua and Barbuda, see Commonwealth realms orders and decorations* Order of Merit * Order of Merit of the Bahamas* Order of Merit of the Police Forces...
The merit order is a way of ranking available sources of energy, especially electrical generation, in ascending order of their short-run marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
s 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 marketElectricity market
In economic terms, electricity is a commodity capable of being bought, sold and traded. An electricity market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use...
of Great Britain
Great Britain
Great Britain or Britain is an island situated to the northwest of Continental Europe. It is the ninth largest island in the world, and the largest European island, as well as the largest of the British Isles...
when electrical power generation was the responsibility of a single integrated utility (the CEGB
CEGB
The Central Electricity Generating Board was the cornerstone of the British electricity industry for almost 40 years; from 1957, to privatisation in the 1990s....
). 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 demandPeak demand
Peak demand is used to refer to a historically high point in the sales record of a particular product. In terms of energy use, peak demand describes a period of strong consumer demand.- Peak load :...
.
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
Peaking power plant
Peaking power plants, also known as peaker plants, and occasionally just "peakers," are power plants that generally run only when there is a high demand, known as peak demand, for electricity.-Peak hours:...
’ 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...