Merit order

Merit order ranks electricity generators by short-run marginal cost, placing lower-cost units first. System operators use the ranking to schedule generation against demand.

Economic dispatch: The allocation of generation among available power plants to meet demand at minimum operating cost. Merit order supplies the cost ranking that economic dispatch uses to allocate output.
Variable cost: A cost that changes with the amount of output produced. Fuel and other output-dependent expenses contribute to a generator’s short-run marginal cost.
Merit-order effect: The reduction in wholesale electricity prices when low-marginal-cost generation displaces costlier generation. It names the price impact of adding low-cost generators to the dispatch stack.
Pay-as-bid auction: An auction in which each accepted bidder receives the price it offered. It contrasts with uniform-price electricity markets often associated with merit-order dispatch.
Short-run marginal cost: The additional operating cost of producing one more unit of output with existing capacity. This is the cost measure used to rank generators in merit order.
Fuel cost: The expense of obtaining fuel used to produce energy. Fuel prices often determine the relative operating costs of thermal generators.
Residual load: Electricity demand remaining after variable renewable generation is subtracted. Dispatchable plants are ranked to serve this remaining demand after wind and solar output.
Locational marginal pricing: A method that calculates electricity prices by location from marginal energy, congestion, and loss costs. It adds location-specific grid costs that a single system-wide merit ranking misses.
Uniform-price auction: An auction in which accepted bids receive the same clearing price, often set by the highest accepted bid. In many electricity markets, the last dispatched generator sets the price paid to accepted generators.
Heat rate: The amount of fuel energy a power plant uses to produce a unit of electricity. A plant’s heat rate translates fuel prices into its fuel cost per unit of electricity.

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