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The Merit Order Stack

KEY LEARNING POINTS:

The merit order is the order in which generation plants are scheduled to supply electricity to meet demand

The highest marginal operating cost generator sets the wholesale price of electricity in a market-based system

The merit order is the order in which generation plants are scheduled to supply electricity to meet demand.

The cheapest-running plants offer to supply electricity first, and then the next-most-expensive plants do so. In this way, the total cost of electricity supplied to meet the demand at any given time is minimised.

Each plant on the system has a different operating cost, as reflected in the merit order stack.

The operating cost or running cost depends primarily on the fuel inputs into the electricity plant. Fossil fuel prices are in general higher than nuclear fuel (e.g. uranium) prices (per unit of electrical energy produced) which means nuclear comes before fossil plants in the merit order. Wind and solar have zero fuel costs, meaning that power generated from these sources comes first in the merit order, and we will see more about how they affect the traditional merit order in Module 3. Additionally, water for hydroelectric power is normally very low cost. However, when the availability of water is low, the cost may be relatively high. 2

Capital costs of power plants do not affect their position in the merit order.

For example, even though nuclear plants tend to have higher capital costs (in terms of their construction cost per unit power capacity) compared to fossil fuel plants, they come lower down the merit order, because of their lower operating costs.

Electricity demand varies throughout the day, with peak and off-peak periods of demand.

Figure 1 shows an example of the changing demand over one day within an electricity system. Depending on the national context, there will be times of lower demand (off-peak) and times of higher demand (peak).

Peak demand

Off- Demand (GW)

Time (hrs)

Fig 1: Example Intra-Day Demand 3

The merit order stack shows the ranking of different generation plants according to their operating costs.

Figure 2 shows a merit-order stack for a typical electricity system without renewables other than hydro. It shows how the off-peak and peak demands in Figure 1 are met by a combination of power plants. The power generation capacity available to meet demand is ranked by operating cost in ascending order. In this example, nuclear, hydro and generation plants at the bottom of the merit order stack are required throughout the day (hydro, nuclear, coal) and we say they are supplying baseload power.

Diesel

Peak power price Oil

Gas (OCTG)

Gas (CCTG)

Off-peak power price Coal Nuclear Marginal Cost (£\MWh) Hydro

Off-peak demand Peak demand

Capacity (GW)

Fig 2: Example Merit Order within a grid with no renewables other than hydro power 4

The merit order stack identifies the marginal generator, which sets the wholesale price of electricity in a market-based system.

The off-peak period labelled in Figure 1 is at 6am. Figure 2 shows that at this time, total demand can be met by hydro, nuclear and coal plants, with the highest cost coal plant setting the wholesale price of electricity. Later in the day, just after 14:00, Figure 1 shows that demand is much higher, in the ‘peak’ period of the day. Looking at Figure 2, at this time, more generation plants are needed to meet this demand: not only the hydro, nuclear and coal baseload plants, but also combined-cycle gas turbine (CCGT) plants, open-cycle gas turbine (OCGT) plants, and some oil plants. It is the oil capacity that sets the wholesale price at this peak demand time.

The merit order stack does not reflect how rapidly plants’ outputs can change.

For example, some plants can supply electricity to the grid within seconds or minutes, making them more suitable to meet short-term fluctuations in demand. Others can take hours or even days to vary their output. In reality, this might impact when they are actually used on the grid, as opposed to simply their position in the merit order. In addition, some plants cannot run below a minimum level of output without losing stability, so must be run at a certain level all of the time. For these reasons, the merit order stack is only a guide to how much output each station will produce, and the challenge of determining which generators to “commit” to supply electricity in a given period (unit commitment scheduling) can be more complex. 5

Some generators may appear to ignore the merit order when selling their power.

Some generators may need to run to provide heat or water desalination, even if their operating costs are higher than those of other generators that are not running. Strictly speaking, we should deduct a payment for the heat or the desalination when calculating the generator’s operating cost and its place in the merit order.

Some generators may sell power on long-term contracts independently of the merit order.

Examples of such contracts are Power Purchase Agreements (PPAs), that set a fixed price for a specified output from a generation plant to a customer. This fixed price will be paid, regardless of the changing wholesale price during the period, and the generator might want to run and receive this price at times when the wholesale price is below its operating costs. This might not happen if the contract could be renegotiated, so that the generator could buy power from the market and deliver this to the buyer of the PPA, instead of generating itself, if this was the cheaper thing to do.

References

Insight_E, (2015), Quantifying the “merit-order” effect in European electricity markets

Staffell, I. and Green, R, (2016), Is there still merit in the merit order stack? The impact of dynamic constraints on optimal plant mix. IEEE Transactions on Power Systems, Vol 31, pp43-53

National Grid, (2016), System Operability Framework 2016 – UK Electricity Transmission

CIFF MOOC 3 Author: Hamish Beath (Imperial College London)