Electricity rates in Germany drop by up to 40% during the hours in which solar power or wind power are active -- and this is what Merit Order ranking is all about, using the cheapest available electricity source first - and then filling in the gaps with more expensive coal-fired electrical power generation.
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 lowest 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.
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