Merit Order and Supply Stack
The merit order sorts generation units by marginal cost; where demand meets the stack determines the 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.
Structural price models use merit-order logic to link commodity prices to power prices and spreads.
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.
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.