Energy and natural resources
Merit order
Running power plants from cheapest to most expensive running cost until demand is met.
Facts checked against sources onWhat does Merit order mean?
In a power market, the merit order ranks plants by their marginal (running) cost, cheapest first, and calls on them in that order until demand is met. In many wholesale markets the price for that hour is set by the most expensive plant needed, the marginal plant, and every plant running receives that price. Example: solar offers 300 MW at 0, nuclear 300 MW at 10 and gas 400 MW at 70. If demand is 900 MW, gas is needed, the price is 70 and solar earns 70 per MWh. If demand is 550 MW, gas is not needed and the price is 10. Adding more zero-cost wind and solar pushes expensive plants out and lowers prices in sunny or windy hours, the merit order effect.
Where does it come up in case interview prep?
- How the power system works, and who makes money in itLesson in Power, utilities and renewables
- Power economics and operations: levelized cost, the merit order, storage and the gridLesson in Power, utilities and renewables
- Power players, trends 2024 to 2026, and how to crack the casesLesson in Power, utilities and renewables
Related terms
- Marginal costThe extra cost of making one more unit.
- Capacity factorA power plant's actual output as a share of what it could produce running at full power all the time.
- Variable costA cost that rises and falls with how much you make.
- CurtailmentDeliberately cutting wind or solar output because the grid cannot take all of it.
- Barrel of oil equivalent (boe)A unit that converts gas into barrels of oil by energy content, so oil and gas can be added together.
- Lifting costThe cost of producing oil or gas from wells that already exist, per barrel.
- Full-cycle breakevenThe oil price a project needs to cover all its costs, including building it, and earn its required return.
- Fiscal breakeven oil priceThe oil price a government needs to balance its budget.
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