Solar feed-in tariffs and the merit order effect: A study of the German electricity market

This study investigates the merit order effect (MOE) of the recent years' implementation of solar power in Germany. Market clearing electricity prices and production levels are compared for the years 2009–2011, and a model for the relationship between the electricity price and price sensitive electricity production is developed and applied to predict electricity prices in Germany from July 2010 to July 2011 with and without solar electricity generation (SEG). The results show that the SEG has caused a 7% reduction in average electricity prices for this period. The average daily maximum price and daily price variation are also found to decrease, by 13% and 23%, respectively. When taking the MOE into account the net consumer's cost of the solar feed-in tariff (FIT) system is found to be 23% less than the charge listed in the electricity bill. The German FIT policy for solar power has been subject to considerable public debate, and a common argument brought up in disfavor of the system is the high cost for the consumers. In this study we demonstrate the importance of including the MOE when evaluating the total costs and benefits of the FIT policy mechanism. •The merit order effect (MOE) of the German solar feed-in tariffs (FITs) is analyzed.•Solar power is found to substitute thermal power on the margin in peak hours.•In a 1 year period, solar power has reduced electricity prices by 7%, on average.•The solar power has also reduced the daily price variation by 23%, on average.•When including the MOE, the net consumer's cost of solar FITs are reduced by 23%.