How the Marginal Costs of Power Stations Determine the Merit Order

Which Electricity Sources have which Marginal Costs?

The marginal cost of a power plant is the cost of generating an additional megawatt hour of electricity. They depend largely on the primary energy source, but also on the type of power plant and the situation in which the electricity is to be generated. In recent years, the marginal costs of power plants in Germany and the merit order have significantly changed.

Marginal Costs of Renewable Energies

Wind and Solar

Wind and sunshine may be volatile, but when they are available, they are free of charge. The investment and operating costs of wind turbines or PV systems hardly change, regardless of how much power they produce, as wear and tear is low and personnel costs are largely independent of operating hours. The marginal costs are therefore close to zero.

Biomass

In Germany, the effective marginal costs of biomass power plants are generally significantly lower than those of conventional power plants that use fossil energy sources, although they have a similar operational cost structure to thermal power plants. This is due to the subsidisation of biomass on the one hand, and the need to purchase CO2 emission allowances for the release of fossil carbon dioxide on the other.

Marginal Costs of Nuclear Power Plants

Nuclear power plants have very high investment costs, but very low marginal costs, especially when the reactor is running at an efficient level. The start-up and shutdown costs of the reactor are so high that operators prefer to sell power by the hour at a price below their marginal costs rather than generate less. In any case, nuclear power plants are hardly suitable for balancing out the fluctuations in renewable feed-in. This is because it takes one to two days to bring a "cold" nuclear power plant up to full capacity. In recent years, Germany's nuclear power plants mostly ran at full load until they were shut down.

Marginal Costs of Thermal Power Plants

For every unit of electricity generated by thermal power plants, a certain amount of fuel must be used. The marginal costs of thermal power plants are therefore significant. How high the costs are depends mainly on the fuel, the efficiency of the power plant and the CO2 emissions per unit of power produced. In addition to fuel costs, the prices of EU emission allowances can influence the marginal costs of power plants to such an extent that the merit order changes. This is precisely the aim of the European Emissions Trading Scheme: to force CO2-intensive power generation out of the market.

Waste

Municipal waste is a very inexpensive fuel. The main costs are for the transportation, while in some cases, waste producers (e.g. residents or companies) even pay for the removal. The marginal costs of electricity from waste have been lower than those of nuclear power in recent years.

Lignite

Lignite currently has the lowest marginal costs of all fossil fuels. At least this is true if it is converted into power in the more efficient new generation power plants. Older lignite-fired power plants require more coal for the same amount of electricity and emit more CO2. This is why not only the raw material costs per unit of power are higher, but also the costs for emission certificates.

Hard Coal

In 2018, hard coal-fired power plants still had slightly higher marginal costs than almost all lignite-fired power plants - mainly because hard coal had to be imported. By 2022, this only applied to the most efficient lignite-fired power plants. This is due to the rising CO2 price: lignite has higher emission values than hard coal, so operators have to purchase more emission certificates per megawatt hour generated. The increased prices for emission certificates have therefore already changed the merit order here: the more efficient hard coal-fired power plants have moved ahead of older lignite-fired power plants thanks to lower CO2 emissions.

Natural Gas

Many gas-fired power plants are significantly more efficient than coal-fired power plants, meaning they convert more primary energy into usable energy. Combined cycle power plants, in which the gas is first used to fire a turbine and then the waste heat is used to drive a steam turbine, achieve efficiencies of around 60 %. Gas-fired power plants are also used more frequently for combined heat and power generation; this also lowers marginal costs because only part of the raw material costs are attributable to the electricity. And there are lower emission costs because natural gas releases comparatively little CO2. Nevertheless, natural gas itself is so expensive that it has the highest marginal costs in power production of all three important fossil fuels in Germany. This was already the case before the gas price shock in 2022.