What is the merit order effect in electricity markets?

• A. The effect of storage on grid reliability.
• B. The effect of consumer energy demand on tariffs.
• C. The effect of carbon pricing on tech selection.
• D. Ordering cheapest generation to meet demand; increased low-marginal-cost renewables can lower wholesale prices and alter dispatch patterns.

Answer: (B)

The merit order effect describes dispatching generation in order of increasing marginal cost to meet electricity demand. When low-marginal-cost generation, such as wind or solar, is plentiful, these resources are dispatched first, pushing more expensive plants out of the mix. The market price is then set by the marginal plant still needed to meet demand, which tends to lower wholesale prices. As renewables occupy a larger share of supply, dispatch patterns shift toward cheaper options and price signals to remain expensive plants lessen. While demand levels and policies like carbon pricing influence outcomes, the core idea is that sorting generation by marginal cost and meeting demand with the cheapest options drives the price down.