The merit order | The Outlet — Pilot Energy

The short version

Every generator in a competitive wholesale market submits an offer price — the minimum it will accept to produce power. The grid operator lines them up from cheapest to most expensive, dispatching units in order until supply equals demand. The last unit needed to meet demand sets the price for everyone. This is the merit order.

Nuclear plants with fuel costs near zero sit at the bottom of the stack and run around the clock. Wind and solar — with zero fuel cost — sit alongside them. Coal, combined-cycle gas, and open-cycle peaker plants stack up above. The marginal unit at any given hour determines the market clearing price, and every generator dispatched receives that price regardless of their own cost — a feature that generates inframarginal rents for low-cost producers and ensures adequate price signals at the margin.

What sets the price at different times of day

During off-peak overnight hours, demand is low and often satisfied entirely by nuclear, hydro, and renewable generation. Prices are low — sometimes very low. As morning load ramps up, combined-cycle gas plants begin setting the marginal price, typically in the $30–$80/MWh range depending on gas prices. During the afternoon peak when AC load is highest and solar is fading, open-cycle peakers enter the stack and prices can spike to $100–$300/MWh or higher during extreme events.

This creates the characteristic daily price shape that sophisticated energy buyers track: low overnight, rising through the morning, peaking in the late afternoon, then falling after the evening ramp. The shape shifts seasonally and varies by market, but the underlying mechanism is always the same — the most expensive unit needed at each hour.

Negative prices and the renewable build-out

As renewables have grown to constitute 20–40% of generation in leading markets, a new phenomenon has emerged: negative wholesale prices. When solar output peaks at midday and thermal generators can't ramp down fast enough, supply exceeds demand and some generators offer negative prices — essentially paying to keep running rather than face the cost of shutting down and restarting.

For renewable generators receiving production tax credits (PTCs), negative prices can still be economically rational: a wind farm earning $15/MWh in PTCs can profitably bid $-10/MWh and still net $5/MWh. This dynamic pushes prices lower during high-renewable periods and increases the value of dispatchable storage that can absorb excess generation and release it during high-price hours.

Why this matters for energy buyers

Understanding the merit order helps buyers interpret the forward curve, assess hedge strategies, and time procurement decisions. A buyer expecting significant new renewable capacity additions in their region might anticipate lower average prices but greater price volatility — and structure their procurement accordingly, with index exposure during hours when renewable output suppresses prices and fixed hedges protecting against high-price peak periods.