Merit order

Merit order indicates the order in which power is bought from power plants on the market. The merit order means that the most expensive plants currently producing determines the price of power on the power exchange.

Power plants are ranked and switched on in the order of their “marginal price,” which is basically the cost of operation (especially fuel); it specifically does not include the cost of plant construction, for instance.

In the case of coal and nuclear, a plant is expensive to construct but relatively inexpensive to operate, so such plants have relatively low marginal prices and therefore run for a large number of full-load hours.

In contrast, natural gas turbines are relatively inexpensive to build, but natural gas is expensive in many parts of the world, so gas turbines run for a fewer number of hours when natural gas is more expensive than coal, as is the case in Germany – but not, for instance in the UK.

In Germany, renewable electricity has a priority on the grid and therefore is not ranked by price (as determined by the German renewable energy act). The effect of renewables is therefore the same as lower consumption; the most expensive peak power plants run less often, thereby lowering the price on the exchange.