Power Pricing: Pay-as-Clear, Uniform Pricing and the Market-Clearing Price
Wholesale power pricing (in Germany and many other liberalized energy markets) follows certain rules. Three concepts are central to this: In uniform pricing, all units of a certain good in a certain market are sold at the same price. In the power market, this uniform price is determined in pay-as-clear auctions that result in a market-clearing price ensuring that the quantity of power covers demand
Definition
Power pricing on the wholesale market in Germany largely follows the laws of the market economy. Like many other wholesale prices, the power price is also distorted by regulatory market intervention on the producer side, for example through subsidies, taxes and CO2 pricing. However, pricing on the power exchange itself is based on competitive criteria.
How does power pricing work on the power exchange?
In Germany electricity is traded on the spot markets in auctions, i.e. on the day-ahead and - since mid-2024 - also in intraday trading (on the delivery day). Additionally, there is also intraday continuous trading after the auctions have taken place.
At the auctions, all power producers offer their electricity at the price at which they are willing to supply it. The bids are accepted in order from the lowest to the highest bid until the entire power demand is covered. The power price from the last bid then applies to all suppliers - regardless of how high their own bid was.
Pay-as-clear, Uniform Pricing and the Market-Clearing Price
As there is no electricity remaining at the end of the auction and no buyer willing to pay more, this is also referred to as a market clearing price. The auction mode is therefore also called pay-as-clear. As this mode ensures that all suppliers receive the same price at the end, it is also referred to as uniform pricing.
Bid Prices in Continuous Intraday Trading
In contrast to day-ahead and intraday auctions, the power price in intraday continuous trading is not auctioned by the hour in pay-as-clear auctions, but in a pay-as-bid process. This means that transactions can be carried out at any time of the day. Such transactions take place whenever the bid price (a buyer's offer) is equal to or higher than the ask price (a seller's offer to sell). It is therefore not an auction, but continuous trading - comparable to stock exchanges.
Forward, Day-Ahead and Intraday trading
Any transaction with a delivery more than 24 hours after trading is considered a futures market; the maximum lead time is six years. In 2023, around 88 % of European electricity transactions on the European Energy Exchange (EEX) took place on the futures market. The power, i.e. the futures, often change hands several times before the power is finally delivered. As a result, the volume of German Power Futures traded on the EEX alone amounted to more than seven times the electricity produced in Germany in 2023.

Electricity trading is growing on exchanges and OTC. The futures business is growing particularly fast. Shown here: On the European Electricity Exchange (EEX), the share of futures in the total volume rose from 80 to 88 percent between 2014 and 2023. Source: EEX, own illustration
Day-ahead and intraday trading are also referred to as spot markets. For the day-ahead auctions, all power suppliers must specify by 12 noon each day how much power they are going to feed into the grid and at what price the next day for each of the 24 hours. In intraday trading, only 5 to 10 % of the electricity is traded. This takes place in continuous transactions and in scheduled auctions. Another difference is that power is not only traded by the hour, but also in quarter-hour blocks.
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What Influence does the Merit Order have on Power Pricing?
As everyone receives the same amount of money for a megawatt hour of electricity at the end of an auction, power producers have no motivation to speculate. An unnecessarily high bid would have no advantage, but would entail the risk of not being awarded a contract.
For this reason, power producers will always base their bids in pay-as-clear auctions on the marginal costs of the particular power plant. These are (generally speaking) the costs of producing an additional unit of electricity. On the power market, solar and wind farms have the lowest marginal costs because their primary energy sources are free. Generating an additional megawatt hour of electricity from conventional power plants, on the other hand, costs a certain amount of fuel such as coal, gas or oil. In addition, the producers have to purchase a corresponding amount of CO2 emission certificates.
As bids at auctions are awarded in ascending order, the power plants are also awarded in order of ascending marginal costs. This (almost) always leads to the same order of power plants. This effect is also known as merit order. Nowadays, the term is also used to describe the resulting power plant dispatch sequence itself.
So the answer to the question above is: none. What's often misunderstood: the merit order is not a legal or any other kind of default, but an economic model that - similar to marginal pricing - describes, not prescribes, a market-based mechanism.

The experts at the Research Center for Energy Economics (FFE) now also use the term merit order to describe the power plant sequence. It is important to note that the term refers to the result of a pricing mechanism, not a predetermined order. Source: FFE
Power Pricing in OTC Trading
Although by far the largest volume of electricity in Germany is traded “over the counter” (OTC), such off-exchange, bilateral contracts are also strongly oriented towards the exchange prices. The reason is that in the event of major deviations (exceeding the exchange fee and trader commission), the exchange would otherwise quickly become the more attractive option for one of the two trading partners.
Example of Power Pricing in Germany
On the Day-Ahead Market
On a fictitious Sunday lunchtime in June, the forecasts for Monday indicate that solar and wind renewables will feed in around 43 gigawatt-hours (GWh) of power between 12 noon and 1 pm. The forecast demand is 60 GWh
As the marginal costs of renewable energy from wind and solar parks are close to zero, their power will be used in any case. 4 GWh of biomass power is also included because sustainably generated power has priority in the grid and is subsidised.
Conventional power plants compete for the missing 13 gigawatt hours on the day-ahead market. As low-cost waste-fired power plants supply no more than one gigawatt-hour, additional coal-fired power plants are required. After several of these were needed during the night, some operators even offer their output below the marginal costs. Their calculation: Ramping up those plants is so expensive that it is more lucrative to only slightly reduce their output-selling the power with a considerable discount. The power plant operator's power traders calculate a marginal price of EUR 31 for a megawatt-hour at which delivery is still profitable. This clears the market and the auction ends at EUR 31. This price now applies to every magewatt-hour that is traded at this time and delivered the following day between 12 noon and 1 p.m. - regardless the power plant generating it.
On the Intraday Market
Until the next day and the actual delivery time (t0), the parameters shift again slightly.
However, all market players (“balancing group managers”) must balance their respective balancing groups at the end of a delivery day. This means that the market players must have an even balance between feed-in and feed-out in the grid for every quarter of an hour. If they are unable to balance one or more balancing groups via the market, they must pay the grid operators for balancing energy, which is usually even more expensive.
This is why every balancing group manager wants to trade any under- and overcapacities on the intraday market on the delivery day.
Case 1: Undercapacity
On Monday, the wind blows not as strong as forecast, and as the day is hotter than expected, air conditioners increase overall power demand slightly more than expected. Coal-fired power stations cannot respond quickly enough to supply the missing 2.5 gigawatt-hours. So efficient gas-fuelled combined cycle power plants step in. The bids for these newly auctioned megawatt-hours are well over EUR 100. Those lacking power in their balancing groups have to bite the bullet and buy it on the intraday market. Those who have too much are happy to sell surplus power at advantageous prices.
As 97 % of the electricity consumed for this delivery day had already been sold by midday the previous day, the higher prices only have a limited effect on the average wholesale electricity price for this hour.
Case 2: Overcapacity
On Monday morning, it becomes clear that the afternoon will be much less cloudy than forecast the day before. The photovoltaic plants will therefore be able to supply more power than expected. The operators of the conventional power plants will try to buy the available solar power for the afternoon in intraday trading. This allows them to reduce their own expensive production early and fulfil their future and day-ahead supply contracts at lower costs. They can meet part of their needs in the newly introduced pay-as-clear auctions. They buy the rest in continuous intraday trading, where - as there is no uniform pricing- prices depend on the current market situation and the skill of the power traders.
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