With the Merit Order describes the order in which power plants meet the electricity demand on the electricity trading venue. It is intended to ensure the best economic power supply. This is therefore a market model and not a mandatory law on the order in which power plants are used and has been generally used since the liberalization of the electricity market in 1998.
For the next day, power plant operators on the European Energy Exchange (EEX) offer the electricity production of their power plants at the respective marginal costs, i.e. the costs required to generate a megawatt hour. However, long-term costs, such as the expansion or reduction of producers, are not taken into account here. This is a common criticism of the merit order model.
Similarly, energy suppliers order the amounts of energy in order to be able to cover electricity requirements for the following day. The EEX stock exchange then sorts the offers from generating power plants in ascending order. This results in the merit order curve. Starting with the cheapest generator, all other power plants are awarded the contract, which are required to cover the load and are used accordingly.
With the merit order, i.e. the deployment order of the generating power plants, and the energy demand, the so-called market clearing price or market clearance price can be determined. This is determined by the most expensive power plant, which receives a contract. In other words, the most expensive power plant that is used to meet demand. This power plant is also known as a border power plant. The market clearing price is therefore the stock exchange price and is paid out for all power plants used. Producers with particularly low marginal costs can therefore achieve very high profits.
The expansion of renewable energy sources means permanently falling electricity production costs and thus a shift in the order of power plants. The marginal costs of renewables are virtually zero, as solar and wind energy are available free of charge. They are thus gradually displacing more and more conventional power plants in the merit order. This phenomenon, the crowding out of more expensive power plants, is also known as the merit order effect and ensures that expensive peak load power plants are used less frequently as price-determining power plants.
Even in the past, gas-fired power plants were the most expensive power plants with the highest marginal costs. Most of the gas used to generate electrical energy came from Russian production in the past. As is well known, the price of gas rose sharply as a result of the war situation in Ukraine and the political consequences. As a result, the marginal costs of gas-fired power plants are also rising dramatically. Since then, the corresponding merit order curve has shown exponential characteristics. If these power plants are used to meet demand, the market clearing price is correspondingly high.
Energy storage systems can lower the average market clearing price in terms of the stock market price. But how does that work? After all, no electrical energy is generated, but the supply is simply delayed.
At a time of high feed-in of renewable energy, the merit order curve is initially very flat. Since this amount of energy covers a large part of the load, the stock market price will be comparatively low. In individual cases, there are even negative stock exchange electricity prices on the market. Therefore, if the load increases due to the loading of a storage device and thus also the demand, the market price rises only slightly due to the flat merit order curve.
However, if the energy supply is low in windless and dark times due to the resulting low supply of renewable energy, the stock market price rises sharply, because power plants now produce electricity with expensive marginal costs and ensure a steeper merit order curve. In these times, charged energy storage systems can create an additional supply and displace the border power plant, the price-determining power plant. In this way, a price-dampening effect can be achieved by deferring the supply. This can also be found in detail in our blog article "Why battery storage systems lower electricity prices" Read up.
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