How does the Merit Order work?

Due to the sharp rise in electricity prices during the energy crisis caused by Russia’s invasion of Ukraine, the pricing mechanism of the European electricity markets – uniform pricing based on the supply curve of the producers (merit order) – is being intensively discussed. As part of this discussion, the German government has already decided to limit so-called “excess profits” of certain electricity producers. The revenue generated in this way is used to soften the high electricity prices for consumers.

In the long term, however, the price mechanism of the European electricity markets is also under discussion, as it may not sufficiently cover fixed costs with an increasing share of renewable energies. In addition, there is the question of whether there are sufficient incentives for the construction of back-up capacities needed to meet demand during periods of low wind and solar generation.

The following infographic describes the pricing mechanism and discusses whether and to what extent adjustments to the market design might be necessary in the short or long term.

Infographic: How does the Merit Order work?