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Merit Order Ranking favours Renewable Energy

by John Brian Shannon

What is Merit Order ranking?

Merit Order is a ranking system used by electric utilities to choose the most cost-effective electricity to add to the grid at any given moment.

Thanks to the magic of computerization, microprocessors make thousands of decisions per day based on parameters set by the utility company to help the utility to make the highest profits — based on ‘the spread’ — the difference between what they pay energy producers (the wholesale price) and the price they charge their customers (the retail price).

Merit Order ranking control room
Most utility companies have Merit Order ranking control rooms similar to this one where decisions are made about which power producer will contribute to the grid. Microprocessors make the instant decisions while humans are present to oversee operations and plan ahead.

The cheapest electricity on a per kilowatt per hours basis (kW/h) is always solar and wind power which has a merit order ranking of 0 (Merit Order 0) which makes wind and solar the automatic default for utility companies that take every bit of it they can get — and only then do they add power to the grid from the number 1 ranked energy source (Merit Order 1) which in the United States, is coal.

Coal would still be the default energy producer as it was for decades, but because coal has a fuel cost attached to it while solar and wind power don’t, coal ranks lower on the merit order ranking scale. Other electricity generators hold different positions on the merit order ranking scale, with natural gas ‘peaking power plants’ the absolute last choice for utility companies because the per kW/h cost of electricity generated by natural gas gas peaking power plants is so high compared to other energy producers.

The German Merit Order ranking system offers an easy explanation

In the German example, electricity rates are determined hourly and customers are charged the corresponding hourly rate.

For our purposes to explain merit order ranking, this works well. In Germany electricity rates drop by up to 40% 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 FIRST — and then filling the gaps with more expensive electrical power generators after all the solar and wind capacity is brought online.

Solar and wind electricity in Germany are rated at Merit Order 0 making them the default for utility companies as they meet their daily demand.

Once all of the available solar and wind capacity is online, only then are, (1) nuclear, (2) coal, and (3) natural gas, ramped up to meet the daily German demand curve.

NOTE: In the U.S. the normal Merit Order rankings are; default (0) for solar and wind, (1) coal, (2) nuclear, (3) hydropower, and (4) natural gas, although this order can change in some parts of the United States, depending which types of energy are produced in a given region.

Still using the German example; 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 percent on the average, with reductions peaking at up to 40 percent 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 costs, solar and wind cost less.

Although solar and wind are expensive to construct initially (but not as expensive as large nuclear power plants, large coal power plants, or large hydro-electric dams) there is no fuel price to pay, no weather-related price spikes, fuel transportation costs, fuel supply disruptions, or lack of rainfall 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’ll hear more about Merit Order ranking.

Only solar, wind, hydro-electric and nuclear power have a predictable kW/h price every day of the year. Coal, home heating fuel and natural gas, do not. And that’s everything to energy producers and their customers, the utility companies.

Although energy companies and utilities were slower than consumers to embrace renewable energy, some are now seeing benefit for their business model and henceforth, things will change.

Buckle up, because big changes are coming to the existing utility business model, changes that will benefit energy producers, energy consumers and the environment.


Related Article:

  • The Variability of Renewable and Non-renewable energy (JBS News)

The ‘Variability’ of Renewable and Non-renewable energy

by John Brian Shannon

Merit Order ranking and the debate about the variability of Renewable Energy on national electrical grids

Merit Order ranking control room
Most utility companies have Merit Order ranking control rooms similar to this one where decisions are made about which power producer will contribute to the grid in real time. Microprocessors make the instant decisions, while humans are present to oversee operations and plan ahead.

Solar Variability

Some people argue that solar photovoltaic (solar panels) produce ‘variable’ electricity flows — and they therefore assume that makes solar unsuitable for use in our modern electrical grid system.

And it’s true the Sun doesn’t shine at night. If you’re discussing one solar panel installation in one farmer’s field, then yes, there is the variability of intermittent cloud cover to consider which may temporarily lower the output of that particular solar installation.

But when grid-connected solar arrays are installed over vast areas in a large state such as Texas or throughout the Northeastern U.S.A., it all balances out and no one goes without power as solar panels produce prodigious amounts of electricity during the high demand daytime hours. If it’s cloudy enough to lower solar panel outputs in one location, then it’s likely to be sunny in other solar array locations within that state or region.

Therefore, solar ‘variability’ disappears when you have many, widely scattered installations and with interconnection to the grid. So much for that accusation.

NOTE: The marginal ranking for solar is (0) and that ranking never varies. (More on marginal ranking, later)

Wind Variability

The situation with wind power is that in many parts of the world the wind tends to blow more predictably at night which helps to add power to the grid while the Sun is asleep.

In fact, complementary installations of solar and wind help to balance each other through the day/night cycle, and through the changing seasons. There’s even an optimum ratio between the number of solar panels and the number of wind turbines in a hybrid (wind + solar) power plant.

And, important to note, offshore wind is relentless in most coastal areas. It never stops blowing in the 5-mile to 200-mile offshore zone.

NOTE: The marginal ranking for wind is (0) and that ranking never varies.

Natural Gas Variability

What? Natural gas isn’t variable, you say!

Oh really? Over the course of the past 60 years, how has the per gigajoule natural gas price changed? Got you there. The natural gas price has risen and dropped by orders of magnitude over the years and wild price swings within one year are quite common.

OK, that’s not ‘output variability’ but it is a variable factor with regard to energy pricing. And that’s a variable that actually matters to consumers as it directly relates to the price they pay for electricity.

Natural gas prices swings have forced utilities to peg their rates to the highest expected natural gas rate. Little wonder investors love natural gas.

So there is natural gas ‘supply variability’ and natural gas ‘price variability’, which is why it’s the absolute last choice for utility companies as they strive to meet the peak demand hours of the day. Gas is an excellent and expensive option, but it does have supply and price variability.

We won’t even talk about the associated CO2 cost to the environment. (OK, it’s about $40 per tonne of CO2)

Coal variability

Not to the same degree as natural gas, but coal also faces price swings and potential supply disruptions — again forcing utility companies to set their rates against unforeseeable labour strikes at mines, railways, or shipping lines — and against coal mine accidents that can shut down a mine for weeks.

As these things are impossible to foresee, the retail price is ‘averaged up’ which results in higher energy bills for consumers and better returns for investors.

Yes, there is variability in coal supply, in coal supply lines, in coal power plant maintenance cycles which can have a plant offline for weeks, and coal market pricing. These things can affect supply output, which is another kind of ‘variability’.

Supply variability and price variability — that’s two variabilities right there.

Again, that doesn’t factor-in other costs to society from burning coal, such as increased healthcare costs from the tonnes of airborne heavy metals, soot, and nasty pollutants besides CO2 that are emitted, which some estimates put at $40-60 per tonne. Stanford claims a $220 per tonne cost for CO2 emissions.

NOTE: Should we talk about how much water coal plants use?

Renewable Energy by water consumption chart.

Hydro power variability

What? Hydro power isn’t variable!

Oh yes it is. Nowadays thanks to global warming, many hydro dams in the U.S. can barely keep water in the reservoir from August through November. They cannot produce their full rated power in a drought, in late summer, during maintenance, or during earthquake swarms. Just sayin’ Hi, California!

An impressive-looking body of water behind the dam is meaningless when the water level isn’t high enough to spill over the dam. If the water level isn’t high enough to spin the turbines then the water is just for show. Take a picture!

In 1984, the Hoover Dam on the Colorado River generated enough power on its own to provide electricity for 700,000 homes because the water level of Lake Mead behind the dam was at its highest point on record. But since 1999, water levels have dropped significantly, and Hoover Dam produces electricity for only about 350,000 homes. — CleanTechnica

And then there is this problem; Drought conditions caused by long-term global warming means that some dams are essentially finished as power producing dams indefinitely.

Again, we have output variability; But this time it is; 1) variable output due to temporary drought conditions, and 2) the normal hydropower variability during the months of year that hydro dams never produce their full rated power anyway.

Price variability: This is what Merit Order ranking is about

Merit Order ranking is a system used by electric utilities to allow different electrical power producers to add power to the electric grid in real time. Thanks to a computerized grid, this occurs on a minute-by-minute basis every day of the year.

In the German example, electricity rates drop by up to 40% 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 and the wind is blowing.

Once all of the available solar and wind (Merit Order ranking 0) capacity is brought online by the utility company, then (1) nuclear, (2) coal, and (3) natural gas (in that order) are ramped up as required 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) hydropower, and (4) natural gas, although this order can change in certain parts of the United States.

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 percent on the average, with reductions peaking at up to 40 percent 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 (but not as expensive as large hydro-electric dams or large nuclear power plants) there are no ongoing fuel costs, fuel transportation costs, fuel supply disruptions, or lack of rainfall to factor into the retail 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 variability. And that’s as it should be.

What matters is that only solar, wind, hydro-electric and nuclear have a predictable kWh price every day of the year. Coal, natural gas, and home heating fuel do not. That’s everything in the utility business.

Although utility companies were slow to embrace renewable energy, some are now seeing benefit for their business and henceforth, things will begin to change. So we can say goodbye to the chatter about renewable energy variability and utility companies can say goodbye fuel-related price spikes.

Buckle up, because big changes are coming to the existing utility model that will benefit energy consumers, energy producers and the environment alike.

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