Merit Order ranking is a system used by most electric utilities to allow different types of electrical power producers to add power to the electric grid. Thanks to a computerized grid, this occurs on a minute-by-minute basis every day of the year.
Price variability: This is what Merit Order ranking is All About
In Germany, electricity rates drop by up to 40 per cent during the hours in which solar or wind are active, and this is what Merit Order ranking is all about; Using the cheapest available electricity source FIRST — and then filling the gaps with more expensive electrical power generation.
Solar and wind electricity are rated at 0 (default) on the Merit Order scale making them the default choice for utility companies when the Sun is shining or when the wind is blowing, or both.
Why? No fuel cost. That’s the difference. And bonus, no environmental nor healthcare hazards with solar and wind either.
Once all of the available solar and wind Merit Order ranking (0) capacity is brought online by the utility company to meet demand, only then are, (1) nuclear, (2) coal, and (3) hydroelectric power ramped to match demand, according to the marginal cost of each type of energy. (German Merit Order rankings)
NOTE: In the U.S. the normal Merit Order rankings are; default (0) for solar and wind, (1) coal, (2) nuclear, (3) hydroelectric, (4) natural gas, although this order can change in some parts of the United States and around the world, depending upon what energy types are available in a given market.
Merit Order ranking represents the per kWh Cost of Wholesale Electricity
The Fraunhofer Institute found – as far back as 2007 – that as a result of the Merit Order ranking system, solar power had reduced the price of electricity on the EPEX exchange by 10 per cent on the average, with reductions peaking at up to 40 per cent in the early afternoon when the most solar power is generated.
Here’s how the Merit Order works:
All available sources of electrical generation are ranked by their marginal costs, from cheapest to most expensive, with the cheapest having the most merit.
The marginal cost is the cost of producing one additional unit of electricity. Electricity sources with a higher fuel cost have a higher marginal cost. If one unit of fuel costs $X, 2 units will cost $X times 2. This ranking is called the order of merit of each source, or the Merit Order.
Using Merit Order to decide means the source with the lowest marginal cost must be used first when there is a need to add more power to the grid – like during sunny afternoon peak hours.
Using the lowest marginal costs first was designed so that cheaper fuels were used first to save consumers money. In the German market, this was nuclear, then coal, then natural gas.
But 2 hours of sunshine cost no more than 1 of sunshine: therefore it has a lower marginal cost than coal – or any source with any fuel cost whatsoever.
So, under the Merit Order ranking of relative marginal costs, devised before there was this much fuel-free energy available on the grid, solar always has the lowest marginal cost during these peaks because two units of solar is no more expensive than one. — Susan Kraemer
It’s as simple as this; With no fuel cost, solar and wind cost less.
Although solar and wind are expensive to construct initially (though not as expensive as hydroelectric dams or nuclear power plants) there are no ongoing fuel costs, no fuel transportation costs, no fuel supply disruptions, nor lack of rainfall in the case of hydroelectric dams to factor into the final electricity price.
As solar panel and wind turbine prices continue to drop thereby encouraging more solar and wind installations, we will hear more about Merit Order ranking and less about the variability of renewable energy. And that’s as it should be, as all types of grid energy face at least one variability factor or more.