What is marginal pricing?
Why you pay for the most expensive plant running, not the average.
Electricity markets clear at the marginal price: the cost of the single most expensive generator needed to meet demand at a given moment. Grid operators line up every offer from cheapest (usually wind, solar, nuclear, hydro) to most expensive (typically gas or oil peakers), and dispatch up the stack until supply meets demand. The price of that last, marginal unit becomes the price everyone gets paid.
It sounds strange: why not pay each plant its own cost? But it's what keeps the lights on efficiently. It signals exactly when and where new capacity is worth building, and it rewards cheap, clean generators with the gap between their costs and the clearing price. The flip side is volatility: when demand spikes and an expensive plant sets the price, costs can jump 10× or more for a few hours.
Frequently asked questions
What is marginal pricing in electricity?
It's the rule that the wholesale electricity price equals the cost of the most expensive generator needed to meet demand right now. All running generators are paid that same clearing price.
Why does it cause price spikes?
When demand is high and a costly peaker plant has to run, that plant sets the price for everyone, so a few hours of scarcity can be dramatically more expensive than normal.