“The cheapest generator always sets the market price.”
Not quite.The marginal accepted offer sets price subject to market design and network constraints; the cheapest units are normally infra-marginal.
Power & Commodities
Merit Order and Supply Stack
The merit order sorts generation units by marginal cost; where demand meets the stack determines the power price.
Mental model
The marginal unit needed to meet demand often sets the clearing power price.
Power systems clear by stacking generation units from lowest to highest marginal cost until demand is met.
Changes in fuel prices, CO₂ costs, or available capacity shift the supply stack and the clearing price.
Explore the mechanism
Which generating unit becomes marginal as demand moves across available capacity?
This merit-order sketch stacks generation units by marginal cost and marks where demand intersects the stack. The clearing price is the cost of the marginal unit; fuel and CO₂ changes shift blocks and the price.
Clearing price ≈ 63 €/MWh · marginal block: CCGT gas
Numbers
Total stack capacity ≈ 70.0 GW
Demand coverage: 40.0 / 70.0 GW
Clearing price ≈ 63 €/MWh
Interpretation
Merit-order logic says power prices are set by the marginal technology that clears the last unit of demand. Low-cost units run almost all the time; expensive units run only when demand is high or cheap capacity is unavailable.
Fuel and CO₂ shocks do not just move prices in parallel. They re-order parts of the stack and can change which block is marginal, so the same demand can clear at very different prices.
UNDERSTAND
What to notice
Structural price models use merit-order logic to link commodity prices to power prices and spreads.
Where it appears
- explaining wholesale power prices
- estimating fuel and carbon pass-through
- building dispatch and stress models
Where the intuition breaks
What this view leaves out
- A static stack omits start-up costs, minimum run times, ramping, transmission congestion, strategic bidding, and scarcity pricing.
Common mistakes
Where this concept sits
Follow the strongest prerequisites, applications, extensions, and contrasts.
Connections for Merit Order and Supply Stack
Merit Order and Supply StackYOU ARE HERE
Foundation ofSpark and Dark SpreadsSpark and dark spreads compare power prices with fuel and carbon costs of marginal thermal generation.
SupportsPower Forward Seasonality and ShapeExpected supply-demand balance and marginal generation costs are core economic drivers of power forward shape.
Supported byHydro Reservoir and Water ValueHydro dispatch changes the available supply stack and therefore can affect marginal power prices.
SupportsBaseload vs Peakload ProductsThe shape of the supply stack and demand across hours helps explain why peak and off-peak power products have different economics.
Foundation of · Spark and Dark Spreads
Spark and dark spreads compare power prices with fuel and carbon costs of marginal thermal generation.
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