  This paper provides insight on the economic inefficiency of the classical
merit-order dispatch in electricity markets with uncertain supply. For this, we
consider a power system whose operation is driven by a two-stage electricity
market, with a forward and a real-time market. We analyze two different
clearing mechanisms: a conventional one, whereby the forward and the balancing
markets are independently cleared following a merit order, and a stochastic
one, whereby both market stages are co-optimized with a view to minimizing the
expected aggregate system operating cost. We first derive analytical formulae
to determine the dispatch rule prompted by the co-optimized two-stage market
for a stylized power system with flexible, inflexible and stochastic power
generation and infinite transmission capacity. This exercise sheds light on the
conditions for the stochastic market-clearing mechanism to break the merit
order. We then introduce and characterize two enhanced variants of the
conventional two-stage market that result in either price-consistent or
cost-efficient merit-order dispatch solutions, respectively. The first of these
variants corresponds to a conventional two-stage market that allows for virtual
bidding, while the second requires that the stochastic power production be
centrally dispatched. Finally, we discuss the practical implications of our
analytical results and illustrate our conclusions through examples.
