Dynamic illustration of the current merit order of German power plants
“Merit order” is the term for the ascending sorted marginal cost curve of electricity generation for thermal electricity generation and forms the basis for pricing on the German electricity market. There was a major public debate about the pricing mechanism, particularly during the 2022 energy price crisis, as electricity prices rose sharply due to the high gas prices and in some cases reached over €1000/MWh. We discuss the background to this in our article on the 2022 merit order. To illustrate the effect of the merit order on the current electricity price, we are publishing the merit order based on current fuel and CO2 prices.
Merit Order of thermal power plants
Since the liberalization of the energy markets, the merit order has formed the basis for pricing on the day-ahead market. Here, energy suppliers submit bids that generally correspond to their marginal costs, i.e. the costs incurred per MWh of electricity generated. This only includes the costs incurred directly as a result of electricity generation; fixed costs are not taken into account. The most expensive bid which is still required to cover demand then determines the uniform or marginal price which all producers receive. When the price is higher than their own bid, suppliers have the incentive to bid as close as possible to their marginal costs in order to ensure that they are selected. This ensures that electricity is generated by the most cost-effective generation units.
Here we publish the current merit order for thermal power plants in Germany based on current energy and CO2 prices. For this purpose, the marginal costs of the power plants are determined by the energy source, the electrical efficiency, the net generation capacity as well as the fuel and CO2 prices of all relevant power plants. In addition, unavailability of generation plants is taken into account according to entso-e [1]. A more detailed description of the methodology can be found in our article on the merit order of thermal power plants in Germany (2018).
Figure 1: Merit Order of thermal power plants in Germany
The cost differences in the use of the same energy source are due to the different efficiencies of the respective power plants. As the thermal generation technology with the lowest marginal costs, electricity generation from the incineration of waste is on the left-hand side. While this was followed for a long time by lignite and hard coal-fired power plants due to low fuel prices, the rise in CO2 prices has led to a less clear picture in which gas and coal-fired power plants have marginal costs in a similar range depending on their individual efficiency. In particular, power plants with combined heat and power generation have lower marginal costs, as they can reduce their marginal electricity costs by generating revenue from the heat they produce. As the generation technology with the highest marginal costs, electricity generation from mineral oil is on the right-hand side of the merit order, together with some gas-fired power plants with low efficiency and the resulting high marginal costs.
Electricity price formation by linking residual load and merit order
For a simplified estimate of current electricity prices, we intersect the merit order with the current residual load, i.e. the load minus the feed-in of renewable energy sources, which have marginal costs close to zero. This is shown in Figures 2, 3 and 4 below for three exemplary hours of the day based on entso-e’s wind, solar and load forecasts [1]. The renewable generation from water and biomass is approximated using the generation of the previous day. For the actual pricing, the export balance would also have to be taken into account. However, a simplified estimate of electricity prices can be made using this methodology.
Figure 2: Merit order of thermal power plants in Germany, as well as renewable generation and load for 4 a.m.
Figure 3: Merit order of thermal power plants in Germany, as well as renewable generation and load for 12 a.m.
Figure 4: Merit order of thermal power plants in Germany, as well as renewable generation and load for 12 p.m.
