Merit order effect and surcharges

The way surcharges in Germany’s feed-in tariff system are calculated right now makes sure that the surcharges go up while prices at the wholesale level go down.

Wholesale prices are going down with more renewable in the mix because of the merit order effect, which is worth billions of euros per year.

Since wind and solar have zero fuel cost, they will always undercut any competition on price. That reduces wholesale prices.

The way the surcharge is calculated right now does not reflect this. The grid operators  get to charge the difference between the feed-in tariff and the wholesale price as surcharge.

That difference goes up as the wholesale price goes down. In other words, while renewable energy is actually making electricity cheaper, it looks exactly the other way round for the consumer who pays the higher surcharge.

That would not be the case if the utilities pass on their savings from lower wholesale prices to the consumer, which does not seem to be happening right now.

The solution is simple. Just change the way the surcharge is calculated. Stop having the merit order effect raising prices.

The way to do that would be to substitute a fixed price per kWh for average wholesale cost which would be calculated from actual cost plus merit order effect.

Now the large German environmental NGO BUND (Friends of the Earth Germany) has proposed doing exactly that. I think this is an excellent idea. Thanks to this tweet by Green Member of Parliament Hans-Josef Fell for the link.

Anything helping with countering the anti-renewable talking point of “high cost” is most welcome.

They also propose to reduce the scope of reductions for large industry.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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