Retrospective modeling of the merit-order effect on wholesale electricity prices from distributed photovoltaic generation in the Australian National Electricity Market Dylan McConnell a,n , Patrick Hearps a , Dominic Eales b , Mike Sandiford a , Rebecca Dunn c , Matthew Wright b , Lachlan Bateman d a Melbourne Energy Institute, University of Melbourne 3010, Australia b Beyond Zero Emissions, 288 Brunswick Street Fitzroy, Victoria 3065, Australia c Solar Thermal Group, Australian National University, Canberra, A.C.T. 0200, Australia d Clean Technology Partners, 28 St Kilda Rd, Melbourne 3004, Australia HIGHLIGHTS c We model the impact of photovoltaic generation on the Australian electricity market. c Photovoltaic generation depresses electricity prices, particularly in summer peaks. c Over the course of a year, the depression in wholesale prices has significant value. c 5 GW of solar generation would have saved $1.8 billion in the market over two years. c The depression of wholesale prices offsets the cost of support mechanisms. article info Article history: Received 2 February 2012 Accepted 23 January 2013 Available online 22 March 2013 Keywords: Merit order effect Photovoltaic generation Electricity market abstract In electricity markets that use a merit order dispatch system, generation capacity is ranked by the price that it is bid into the market. Demand is then met by dispatching electricity according to this rank, from the lowest to the highest bid. The last capacity dispatched sets the price received by all generation, ensuring the lowest cost provision of electricity. A consequence of this system is that significant deployments of low marginal cost electricity generators, including renewables, can reduce the spot price of electricity. In Australia, this prospect has been recognized in concern expressed by some coal- fired generators that delivering too much renewable generation would reduce wholesale electricity prices. In this analysis we calculate the likely reduction of wholesale prices through this merit order effect on the Australian National Electricity Market. We calculate that for 5 GW of capacity, comparable to the present per capita installation of photovoltaics in Germany, the reduction in wholesale prices would have been worth in excess of A$1.8 billion over 2009 and 2010, all other factors being equal. We explore the implications of our findings for feed-in tariff policies, and find that they could deliver savings to consumers, contrary to prevailing criticisms that they are a regressive form of taxation. & 2013 Elsevier Ltd. All rights reserved. 1. Introduction The design of policies to assist the transition to low emission electric power production presents significant challenges. Any new generation necessarily incurs significant up-front cost, and this is particularly the case for renewables such as solar photo- voltaic (PV). On a levelised cost basis, solar PV is currently an expensive way to produce electricity. However, solar PV has a well-established and demonstrated learning curve that is produ- cing significant cost reductions, reducing at about 22% for each doubling in deployment (Breyer and Gerlach, 2010). Many ana- lysts anticipate that solar PV will reach retail grid parity in this decade (Breyer and Gerlach, 2010; EPIA, 2011; Gerardi and Stevens, 2011), at which time it will become cost competitive with residential electricity tariffs. An objective of policy measures, such as guaranteed feed-in tariffs, is to help realize grid-parity in the near-term. However, policies such as feed-in tariffs that are designed to accelerate deployment of renewable energy remain controversial. They have been criticized for the impact they have on consumer Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/enpol Energy Policy 0301-4215/$ - see front matter & 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.enpol.2013.01.052 n Corresponding author. Tel.: þ61 3 8344 6538; fax: þ61 3 8344 7761. E-mail address: dylan.mcconnell@unimelb.edu.au (D. McConnell). Energy Policy 58 (2013) 17–27