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.
Germany has adopted Merit Order ranking. It is also heavily-dependent on coal for it’s electrical generation, especially now, as eight nuclear power plants have been been taken offline for safety reasons — and the remaining nine will be decommissioned by 2022 for political reasons.
Using the German example — instead of paying for hundreds of tonnes of coal to be burned between the peak energy consumption hours of 10 am and 6 pm, solar-powered electricity adds to the grid — allowing much less coal to be burned.
In Germany, the wind tends to blow regularly at night, therefore, wind-powered electricity is added to the grid and the amount of coal fed to the pile is much less.
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.
Merit Order ranking is better for the environment, better for the consumer and significantly better for large energy users such as industry, farming, commercial buildings and institutions.
In Germany, energy users are actually scheduling their peak electrical usage periods to coordinate with M.O.R. schedules to save significant amounts of money on their electrical bills.
Over time, M.O.R. peak energy savings accumulate to allow significant cost reductions across the economy and as more euros are freed-up for other uses instead of energy costs, this savings can lower the cost of goods, increase exports, add to corporate profit, create jobs and contribute positively to German GDP — especially on account of Germany being an export-driven manufacturing-based economy.
It’s as simple as this: with no continuous per tonne fuel costs, solar and wind cost less. Although solar and wind are expensive to construct initially, there are no ongoing fuel and transportation of fuel costs. This largely accounts for the difference in electricity prices in the German example.
As solar power panels and wind turbine costs continue to drop (dramatically over the past two years) allowing more solar and wind installations, we will hear more about Merit Order ranking.
In addition to cleaner air, lower health care costs due to decreasing airborne pollutants emitted from fossil fuel power plants and less spalling on historic buildings due to the effects of acid rain, Germans are saving money due to the German government decision to switch to a greater share of solar and wind power. Over time, these savings will accumulate to (and surpass) hundreds of millions of euros.
If solar and wind power in Germany (which presently account for just under four percent of Germany’s total electrical energy production) can have this great an impact on German electrical rates — imagine how rates will change when the installed capacity of solar and wind power doubles to eight percent — about three years from now.
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