Quantifying the "merit-order" effect in European electricity markets

The increase in renewable energy sources has contributed to containing and even lowering electricity wholesale prices in many markets (although not necessarily retail prices) by causing a shift in the merit order curve and substituting part of the generation of conventional thermal plants, which have higher marginal production costs. This merit order effect along with priority dispatch can affect revenues of conventional power plants, especially in Member States experiencing rapid deployment of variable renewables. In some Member States, this raises the question of how to ensure adequate investment signals on generation guaranteeing capacity and balancing power at the lowest possible cost. This Rapid Response Energy Brief quantifies the merit order effect in 2030 and 2050 in European electricity wholesale markets by comparing electricity systems in a Reference and Mitigation Scenario for both years. Scenario results show for the Scenario modelled that the reduction in wholesale electricity price between scenarios is on average €1.6/MWh and €4.2/MWh for 2030 and 2050 respectively. A simplified approach is also used to assess the impact of Demand Response on system costs.