Powering Europe - European Wind Energy Association

analysis
Merit order and volume merit order
effect
As shown in the previous chapter, due to wind’s lower
marginal costs (zero fuel costs), when there is more
of it on the power system, it replaces conventional
technologies and the price goes down. Consequently,
some of the most expensive conventional power
plants might be no longer needed to meet demand.
At a fixed demand level, as long as the whole merit
order curve has a positive slope, the reduced conventional
supply leads to a lower average power price. As
this means market prices are shifted along the meritorder
of the market’s power technologies, the effect is
called merit order effect (MOE).
In this study, the merit order effect is determined by
calculating the difference in the long-term equilibrium
price level of the Reference scenario and the Wind
scenario.
In the analysis, the merit order effect – the difference
between the equilibrium price levels in the two scenarios
– has been estimated at 1.08 €cent/kWh or
€10.8/MWh. The Reference scenario resulted in an
equilibrium price of 8.58 €cent/kWh whereas the
Wind scenario indicated a price of 7.5 €cent/kWh.
Assuming that the entire power demand is purchased
at the marginal price, the overall volume of the MOE
can be calculated for the scenarios. The “volume effect”
refers to the total savings made due to wind
power penetration in a particular year. The price difference
of the two scenarios would represent the
volume merit order effect of increased wind power
capacities. It could be calculated by taking the
equilibrium price difference of both scenarios, 1.08
€cent/kWh, multiplied by the Wind scenario’s overall
demand of 3,860 TWh.
The overall volume merit order effect, comparing the
Wind scenario price with the Reference scenario price
would then be €41.7 billion per year 12 .
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However, it would be misleading to interpret this as
the overall economic benefit of increased wind power
generation. When wind power reduces the average
power price, it has a significant influence on the price
of power for consumers. When the price is lowered,
this is beneficial to all power consumers, since the
reduction in price applies to all electricity traded – not
only to electricity generated by wind power. However,
at the same time, the power producers’ short-term income
decreases at lower power prices, meaning the
MOE causes a redistribution of income from the producers
to the consumers of electricity. Only the longterm
marginal part of the generation which is replaced
by wind has a real economic benefit.
However, the assumed amount of additional wind power
investments has an economic cost, usually given
through investment subsidies, feed-in tariffs or other
support. For this reason, in order to determine the actual
economic benefit of increased wind power generation,
the annual savings in costs deriving from the
merit order effect should be related to the total annual
costs in form of wind power support.
There is only an overall economic benefit if the volume
of the merit order effect exceeds the net support for
wind power generation, paid for by the end-consumer.
Ideally, subsidies to fossil fuel and nuclear power
should also be taken into account to determine the
economic benefits, but this is beyond the scope of
this analysis.
tablE 3: oVERViEw on MoDEllinG REsUlts: MERit oRDER
anD VolUME MERit oRDER EffECt.
wind
generation
volume
Merit
order
effect
Volume
order
effect
Merit order
effect per
wind Mwh
Year TWh/a €/MWh billion €/a €/MWh
2020 648 10.8 41.7 64.4*
*This figure indicates the merit order effect for 1 MWh of wind power. It is calculated
by dividing the volume order effect by the total wind generation volume. It should be
compared to the support level given to wind power generation per MWh, in order to
estimate the economic benefits of wind power.
12 In the project’s first phase, the conducted literature survey indicated some volume order effects, only for single countries, e.g.
Germany. There, a volume order effect of €1.3 - 5 billion per annum has been shown. In comparison, this model analysis would
result at a volume order effect of €6.7 billion per annum for Germany, if looking at the country specific results only.
Powering Europe: wind energy and the electricity grid