The Merit Order Effect And Solar Power : A Primer


Solar energy’s supporters have been whispering about the ‘Merit Order Effect’ (MOE) for some time now and those whispers are only growing in volume. So what is this mysterious Merit Order Effect and what is its relationship to solar power?

Wikipedia defines “Merit Order” in relationship to electricity generation as a way to rank available sources of energy in order of their short-run marginal costs of production, with view to bringing the sources with the lowest marginal costs online to meet demand before the higher cost sources.

You may be surprised as what those high cost sources actually are.

Wholesale electricity pricing in Australia is extremely volatile – it’s all about demand and can change daily; even hourly.

As mentioned in an article from last year on air-conditioners; the rapid uptake of power sucking appliances can mean more emissions belching coal-fired or gas peak power plants needing to be brought online just to cope with extra load; particularly during hot days.

Unlike baseload fossil fuel plants, peak plants can be started up at comparatively short notice; shutting down when no longer required. While they may be idle during these periods, they still need to be maintained. These plants are also expensive to build – around $300 million each.

The electricity produced by peak power stations is also incredibly expensive and when they are called upon, it can boost the general wholesale cost of electricity up to $12,500 per megawatt-hour – $12.50 per kilowatt-hour wholesale; which is the maximum price allowed under National Electricity Rules. This cost is spread among all electricity consumers, raising power bills.

While some may believe the price paid to solar power system owners under feed in tariffs arrangements in certain states is overly generous; it’s a pittance by comparison to what gas and coal fired electricity generators; those with the supposedly “cheap” fuels, can receive in peak scenarios.

Even the much maligned Solar Bonus Scheme in New South Wales prevented the need for more peak power stations to be constructed for several years.

The most generous feed in tariff program currently accepting new participants in this country is in Queensland; which pays system owners 44c per kilowatt hour for surplus electricity they generate. These systems crank out their emissions-free electricity during daily peak periods and the “wholesale” cost of this electricity is around $440 per megawatt hour.

This may sound expensive, but $440 for solar vs. $12,500 for sources such as coal fired electricity generation during peak demand in particularly high usage conditions, such as an extreme heatwave, puts solar PV well in front of fossil fuels in the Merit Order.

Even in less demanding circumstances, power generation from traditional fuel sources can be many hundreds or even over a thousand dollars during peak periods.

So, under the definition of “Merit Order”, solar panels rank strongly highly in some peak conditions; cheaper than coal and cheaper than gas. But what about under business-as-usual conditions and over a long period of time? We can look to Germany, which also offers generous feed in tariffs, for the result.

RenewEcononomy’s Giles Parkinson’s article: “Why Generators Are Terrified Of Solar” and accompanying graphs based on data from EPEX, the European power price exchange, is a real eye-opener. It busts the myth of solar being a major contributor to Germany’s high electricity prices. In fact, it’s quite the opposite – solar energy has reduced the price of wholesale electricity overall in the nation – all due to the Merit Order Effect.

As Giles states in relation to Germany: “ PV is not just licking the cream off the profits of the fossil fuel generators – as happens in Australia with a more modest rollout of PV – it is in fact eating their entire cake.”