The "merit-order effect"

Electricity produced under a FIT law can help to reduce the average cost of electricity by affecting the wholesale price. Because renewable electricity must be purchased before other sources, the size of the remaining demand to be purchased on the spot market is reduced. Under the "merit order" principle, plants with the lowest costs are used first to meet demand, with more costly plants being brought on line later if needed. The most expensive conventional power plants are therefore no longer needed to meet demand. If the FIT tariff (or price) is lower than the price from the most expensive conventional plants, then the average cost of electricity decreases, and this is called the ‘merit-order effect’. This decrease was estimated to be about € 5 billion in Germany in 2006.