Merit Order Explainer
Understanding how electricity markets work and power plants are dispatched based on cost efficiency.
What is the Merit Order?
Imagine you need to buy a certain number of items, and you have a list of sellers, each offering the same item at a different price. To get the best deal, you'd start by buying from the cheapest seller, then the next cheapest, and so on, until you have everything you need.
The Merit Order in electricity markets works in exactly the same way. It's a method of ranking available power generation sources based on their marginal cost, from lowest to highest. The marginal cost is essentially the cost of producing one additional megawatt-hour (MWh) of electricity.
Power plants with the lowest marginal costs are dispatched first to meet the electricity demand. The last power plant needed to satisfy the demand sets the wholesale electricity price for all generators in that period through uniform pricing.
Typical Generation Order
Renewables
Capacity: 15 GW
Cost: $0/MWh
Nuclear
Capacity: 8 GW
Cost: $10/MWh
Coal
Capacity: 10 GW
Cost: $40/MWh
Gas CCGT
Capacity: 10 GW
Cost: $75/MWh
Peaker Plant
Capacity: 5 GW
Cost: $150/MWh
Merit Order & Price Simulator
Generation Stack Visualization
Dispatch Status
Market Price
Try These Experiments:
- •Low demand (15-20 GW): Only renewables and nuclear needed. Price set by nuclear at $10/MWh.
- •Moderate demand (30-35 GW): Coal plants come online. Price jumps to $40/MWh.
- •High demand (45+ GW): Expensive gas plants needed. Price reaches $75/MWh or higher.
Key Insights
Merit Order Effect
When more zero-cost renewables are available, they push expensive fossil fuel plants down the order, leading to lower wholesale prices for everyone.
Uniform Pricing
All generators receive the same price regardless of their individual costs - the price of the most expensive plant needed to meet demand.