Merit Order Basics

In most U.S. wholesale electricity markets, the most expensive generator needed to meet demand in a given hour sets the price that every generator receives. A nuclear plant with $10/MWh operating cost gets paid the same $80/MWh as the gas peaker that set the clearing price. This is not a flaw. It is how the merit order works.

The dispatch stack covered the ordering: cheapest first, until supply meets demand. The market design insight is what everyone gets paid. All dispatched generators receive the clearing price set by the marginal unit, so low-cost generators earn revenue far above their own costs, and that gap is what recovers their capital.

Build the stack. Wind and solar bid $0/MWh (zero fuel cost). Nuclear bids $10/MWh. Gas combined-cycle bids $30/MWh. Gas peaker bids $80/MWh.

Clear the market. If demand requires all four, the clearing price is $80/MWh. The wind farm earns $80/MWh on power that cost $0 to produce. That margin covers its capital cost and financing.

What happens to the clearing price when large amounts of solar flood the midday market?

The merit order effect. Zero-marginal-cost solar pushes expensive generators out of the dispatch order during sunny hours. The clearing price drops, sometimes to zero or negative.

The merit order explains both why renewables suppress wholesale prices and why market redesign is under active debate in every major electricity market.

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