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Concept
Merit order
Summary
The merit order is a way of ranking available sources of energy, especially electrical generation, based on ascending order of price (which may reflect the order of their short-run marginal costs of production) and sometimes pollution, together with amount of energy that will be generated. In a centralized management, the ranking is so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line. Dispatching generation in this way, known as economic dispatch, minimizes the cost of production of electricity. Sometimes generating units must be started out of merit order, due to transmission congestion, system reliability or other reasons.
In environmental dispatch, additional considerations concerning reduction of pollution further complicate the power dispatch problem. The basic constraints of the economic dispatch problem remain in place but the model is optimized to minimize pollutant emission in addition to minimizing fuel costs and total power loss.
The high demand for electricity during peak demand pushes up the bidding price for electricity, and the often relatively inexpensive baseload power supply mix is supplemented by 'peaking power plants', which charge a premium for their electricity.
Increasing the supply of renewable energy tends to lower the average price per unit of electricity because wind energy and solar energy have very low marginal costs: they do not have to pay for fuel, and the sole contributors to their marginal cost is operations and maintenance. With cost often reduced by feed-in-tariff revenue, their electricity is as a result, less costly on the spot market than that from coal or natural gas, and transmission companies buy from them first. Solar and wind electricity therefore substantially reduce the amount of highly priced peak electricity that transmission companies need to buy, reducing the overall cost.
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