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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).
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.
- The Variability of Renewable and Non-renewable energy (JBS News)
by John Brian Shannon | July 29, 2017
All I’m asking for is that renewable energy gets the same subsidies as fossil fuels or nuclear energy. Is that so unreasonable?
You can determine the subsidy costing by any method you choose using a per unit of energy formula — per Barrel of Oil equivalent (BOe) or per kW/h, or any other unit of energy formula you want — but conventional energy gets four-to-six times the subsidies as renewable energy, depending upon which method you use for your calculations.
America’s energy security is better served by LETTING THE MARKET CHOOSE what’s best for the continent and that can only happen when all energy producers play on the same subsidy playing field.
Renewable Energy adds to national security, while Conventional Energy leaves North America vulnerable
North America’s biggest national security vulnerability (aside from bio-warfare) comes from the hundreds of thousands of miles of electrical transmission corridors (pylons and power lines) and pipelines that crisscross the continent.
Every Pentagon General, along with every military rank down to Corporal knows it would be boringly easy for even the most inept enemy of the United States and Canada (both national grids are interconnected) to destroy the North American grid with as little as three well-placed air-to-ground missiles, or alternatively, three truck bombs. Those interconnect sites are unbelievably unprotected.
If that were to happen in mid-winter, hundreds of thousands of North Americans would die, and that’s indisputable.
That it hasn’t happened, proves to me that North America doesn’t have any ‘real’ enemies or it would have occurred a long time ago. (Yes, the U.S. and Canada are ‘irritated’ at some countries and some countries are ‘irritated’ at us. But by virtue of the fact that *they haven’t hit us where we’re most vulnerable* proves they aren’t real enemies, they’re only ‘irritants’)
Centralized Power vs. Decentralized Power
Conventional grid adherents are living in a previous century — a centralized grid WAS the best thing for North America in the 20th-century — but those days are long gone!
Fossil fuel supporters should stop helping our enemies, which they do by supporting a conventional national grid that even the U.S. military 3X over couldn’t protect!
Decentralized power is the ONLY choice for an energy-secure America!
Make better investment returns on Renewable Energy by leveling the subsidy playing field
I understand that many people are heavily invested in fossil fuels and nuclear power — and I don’t blame them, they were safe and secure investments for decades but such industries run counter to the national interest in the 21st-century — good investment returns aside.
And yes, the ONLY reason you have those high returns is that those industries are heavily-subsidized by U.S. and Canadian taxpayers; Oil & Gas get $80 billion per year in the U.S. and about $10 billion annually in Canada, nuclear a bit less — but nobody really knows for sure, not even the governments — because it’s all mashed together with nuclear fuel production, long-term ‘spent fuel’ storage, nuclear warhead production and nuclear warhead disposal.
Citizens can’t see this because those white elephants are obscured by mountains of cash!
Efficient investment vs. Inefficient investment
Energy companies have become like the Big 3 during the 1960’s and 1970’s, big, powerful, lazy, and wholly unwilling to adapt to changing market conditions.
Remember way back in 1970 when 95% of cars registered in the U.S.A. were domestic built and sold? Well, due to the laziness of the Big 3, in 2017 less than 35% of new car registrations are North American makes, and more than half of the parts of North American manufactured vehicles are supplied by Asia or Mexico!
You call that progress???
It’s killing North America!
A high 35% corporate tax rate in the United States might have had something to do with how that came to pass.
Renewable Energy creates more jobs than Conventional Energy (even using fossil fuel industry stats!)
Millions of people are unemployed in North America because the 1% wanted higher investment returns on their energy stocks so North American corporations off-shored millions of jobs! UN-AMERICAN in the extreme! (You already ‘work’ for China’s interests by sending North American jobs there, why don’t you just move there?)
Fossil fuel companies and their investors MUST become patriotic by relearning how to be ‘fleet of foot’ and adapting to the changing national security paradigm — and become ‘ENERGY COMPANIES’ instead of (only) Oil & Gas or (only) nuclear or (only) coal companies.
Profit is a great thing! Energy companies should make plenty of profit because energy is an ultra-important factor in the 21st-century. However, uneven energy subsidies are not a great thing.
Putting a square peg in a square hole, not a square peg in a round hole
When we train soldiers, we don’t try to put a square peg in a round hole — we choose those people based on their merit.
(The best snipers become snipers — not truck drivers. The best tank captains become tank captains — not dishwashers. And the best fighter pilots don’t peel potatoes aboard our warships!) Rather obvious when you think about it, isn’t it?
By the same token, if electricity companies were to embrace ALL energy (they don’t do it now because some energy is highly subsidized and some isn’t) they could then have the option to put a round peg in a round hole and a square peg in a square hole. As it should be!
I must add that gas-fired power generation is increasingly important towards meeting demand — and even moreso as increased renewable energy capacity comes on stream. Natural gas burns up to one million times cleaner than brown coal (lignite) and up to ten-thousand times cleaner than the best black coal (anthracite) and gas power plants can be as local to demand centres as required — quite unlike hydro-power dams and coal-fired power plants, and even nuclear power plants which also aren’t welcome near city centres.
Again, by setting an even subsidy playing field THE MARKET will choose which kind of power to best use in what location — and don’t worry — your precious investment returns will be just as high as they are now. Maybe higher!
As for U.S. jobs, solar produces more jobs than fossil fuel and nuclear power producers put together — and rising exponentially.
By setting a level subsidy playing field, the cream of the crop among energy producers will rise to the top, and market forces will choose which peg to put in which demand hole — nothing could be more efficient!
And in that case, renewable energy will win hands down — with natural gas-fired generation rising to meet demand to cover the variability of onshore wind power output (but not offshore wind power, because there the wind blows relentlessly) and solar power output after the Sun sets.
National security will become greatly enhanced as North America will no longer be dangling from a thread via the hundreds of thousands of miles of pylons and power lines that will no longer be required, as renewable energy is local energy, while conventional energy must carry electricity many thousands of miles. (And natural gas-fired generation can be local energy too, when the power plant is sized according to local demand)
Stop choosing profit over North American national security!
Stop arguing against North American national security, stop arguing against a free market, and stop arguing that you can’t make the same or better profits via renewable energy — assuming the same per unit of energy subsidies as conventional energy receives. It’s intellectually dishonest.
And for those who want to send me ‘green bullets’ (we all know what that code-phrase means) be man enough to bring it to my face, mano a mano.
I’m in Vancouver.
On the economics of wind and solar power — by Lion Hirth
“Many hope that wind and solar power will eventually become economically competitive on large scale, leading the way to a global low-carbon economy. Are these hopes justified?”
November’s COP22 climate summit of Marrakech gave climate policy fresh tailwind, after the blow of Donald Trump’s election. Even without a strong global treaty, national climate policies are multiplying — at least a certain type of policies. While the policy that economists often recommend — putting a price on greenhouse gas emissions — remains patchy, as a recent World Bank report shows, subsidies for renewable energy are booming: no fewer than 145 countries support renewables today. Germany’s Energiewende is a prominent, but not the only example: Obama’s Clean Power Plan features renewables as a centerpiece of climate policy, India’s National Solar Mission includes a 100 GW solar power target. In addition China is said to be considering a 200 GW target, and Morocco has announced the building of the largest solar power facility on the planet. Nearly half of all newly added electricity generation capacity was based on renewables. In ten countries, wind and sun deliver more than 10% of electricity consumed. These includes Denmark (43%), Portugal (24%) and Spain (23%).
Many hope that wind and solar power will eventually become economically competitive on large scale, leading the way to a global low-carbon economy. Are these hopes justified?
On the cost side, the economics of renewables look impressive. The costs of wind power have dropped significantly. On average, wind now generates electricity at $70–80 per Megawatt-hour (MWh) globally, as reported by the two international think tanks IRENA and IEA. Ten years ago, a roof-top solar array for a single family home cost more than $50,000 — today it sells for less than $14,000. (America’s LBNL and Germany’s Fraunhofer ISE provide more data.) Germany, which receives less solar radiation than southern Canada, now generates solar power at $90 per MWh. The United Arab Emirates have tendered a solar power station for $58 per MWh and recent auctions in Chile, Peru and South Africa have resulted in even lower prices.
In some countries, wind and solar power are now cost-competitive with coal- and natural gas-fired power plants, even when carbon emissions are not priced. However, cost structures are very country-specific, and cost-competitiveness is not universal. Renewables tend to be cheaper where it is windy or sunny, where investors have access to low-cost finance, where fossil fuels are pricey, and where emissions are priced. In many places, however, coal-fired power plants remain the cheapest option for producing electricity, driving the renaissance of coal. Still, for renewables to have caught up with fossil plants in cost terms represents a huge success for wind and solar power.
Costs are, however, only one side of the competitiveness equation. The other is value. Merely comparing electricity generation costs between different plant types is misleading, as it ignores the fact that the economic value of electricity from different power stations is not the same. This is because on wholesale markets the price of electricity fluctuates from hour to hour (or even minute to minute). Some power plants produce electricity disproportionately at times of high prices (so called “peaking” plants), while others produce constantly at low prices (“base load” plants). This little detail has striking consequences for the economics of wind and solar power. Paul Joskow and Michael Grubb observed this a while ago.
On the value side, the outlook for renewables is…