Merit order and the marginal unit

Market question. Why can a small change in demand or availability cause a large price change even when most generators' offers have not moved?

Step 1

Build the stack from offers, not average costs

In the simplified model, the operator orders available energy blocks from lowest to highest offer and accepts blocks until demand is served. The final accepted block is marginal. Its offer sets the uniform energy price paid to all accepted MWh in this teaching model.

This mechanism is intentionally narrower than an ISO/RTO market-clearing engine. Real dispatch can include transmission constraints, losses, unit commitment, ramp limits, reserves, security constraints, multi-part offers, and market-specific pricing rules. The merit order isolates one causal channel: the cost of the next feasible MWh.

Worked example

Canonical two-unit dispatch

Consider two synthetic, fully available blocks:

Canonical synthetic stack
Unit	Capacity	Offer
Unit A	100 MW	$20/MWh
Unit B	100 MW	$50/MWh

Demand is 150 MW. Unit A supplies its full 100 MW. Unit B supplies the remaining 50 MW. Unit B is marginal, so the modeled clearing price is $50/MWh. The capacity-weighted average offer is irrelevant to this marginal price.

dispatch A = 100 MW; dispatch B = 50 MW; price = $50/MWh

Canonical merit-order result

Pause and predict

If demand falls from 150 MW to 100 MW with both units available, which offer sets the model price?

Step 2

Scale the mechanism to a larger stack

The registered figure uses a larger synthetic system: renewable, nuclear, coal, combined-cycle gas, and peaker blocks with deliberately separated offers. Move demand through the stack and identify where the right edge of demand intersects the ordered available capacity.

System demand 5800 MW

$61/MWh clearing price. Combined-cycle gas is marginal.5800 MW dispatched from 7900 MW available.

At the registered base demand of 5,800 MW, cumulative capacity through coal is 5,100 MW. The combined-cycle gas block supplies the next 700 MW and is marginal at its synthetic $61/MWh offer. If demand remains within that block, dispatch quantities change but the marginal offer does not. Once demand crosses a block boundary, the next offer can reprice all accepted energy in this uniform-price abstraction.

Ties and partial dispatch

A marginal block can be partially dispatched, as Unit B is in the canonical example. If multiple blocks share the same offer or other constraints bind, a full market engine needs tie-breaking and feasibility logic. The teaching model should not be used to infer which physical unit received an award.

Step 3

Remove capacity and distinguish repricing from shortfall

An outage removes available capacity from its original position in the stack. If demand can still be served, a higher offer may become marginal and reprice the modeled market. If total available capacity is below demand, there is no energy-only clearing price implied by this stack alone.

Return to the canonical example. If Unit A is unavailable and demand remains 150 MW, Unit B can supply only 100 MW. The model reports a 50 MW shortfall. It must not invent a scarcity price, because no scarcity-pricing rule has been specified. If demand were 75 MW instead, Unit B would serve it and the modeled price would be $50/MWh.

$61/MWh clearing price. Combined-cycle gas is marginal.6800 MW dispatched from 7900 MW available.

At 6,800 MW in the registered larger stack, cumulative capacity through combined-cycle gas is 6,900 MW, so that block is marginal if every block is available. Removing capacity can require the $95/MWh peaker or produce a shortfall, depending on which block is unavailable and how much capacity remains.

Apply the mechanism

Return to the larger stack at 5,800 MW demand. Coal's 1,500 MW block is unavailable, while every other block remains available. Calculate the new clearing price in $/MWh.

$/MWh

Pause and predict

In the canonical stack, Unit A is out and demand is 150 MW. What can this model conclude?

Apply the mechanism

Solve this synthetic stack: A is 100 MW at $20/MWh, B is 100 MW at $50/MWh, and demand is 150 MW. State dispatch, marginal unit, and price. Then remove A and state the remaining dispatch and shortfall without assigning a scarcity price.

Your response

Takeaways

The marginal unit is the final accepted block serving the last increment demanded.
A partially dispatched block can set the uniform price in the simplified model.
Demand and outages matter through their position relative to offer-block boundaries.
Capacity shortfall and scarcity price are not synonyms. A price requires the applicable pricing rule; this model reports shortfall when supply is insufficient.

Selected sources

Sources and model boundaries

Federal Energy Regulatory Commission: Understanding Energy MarketsRetrieved 2026-08-03.
High-level market-design context; regional implementation details vary by organized market.
Federal Energy Regulatory Commission: Energy PrimerRetrieved 2026-08-03.
A broad federal primer; it does not substitute for market-specific tariff and operating-rule analysis.
ERCOT: Market PricesObserved: Operating day 2026-01-24; corrected RTM files approved 2026-06-01.Retrieved 2026-08-03.
ERCOT publishes observed prices and correction archives. January 24, 2026 analysis must use corrected RTM files; prices alone do not reconstruct dispatch, offers, constraints, losses, adders, or settlements.