The “missing money problem” refers to the idea that prices for energy in competitive wholesale electricity markets may not adequately reflect the value of investment in the resources needed for reliable electric service. In this article published in The Electricity Journal, Michael Hogan unpacks the missing money issue, recapping how energy prices should be expected to be set in a competitive electricity market, the role they are intended to play in shaping critical investment decisions, and some of the ways they can go wrong. He then develops a robust and sustainable strategy for tackling missing money and ensuring a reliable, low-carbon electric supply at the lowest reasonable cost.
The critical insight that differentiates the article’s recommendations from the many other treatments of missing money and reliability is that measures to address missing money must address the entire objective—not simply to ensure reliability, but to ensure reliability at the lowest reasonable cost. The various out-of-market “capacity remuneration mechanisms” often adopted to address missing money are creating a different problem, misallocated money. By overcompensating some resources and undercompensating others, misallocation creates structural incentives to invest in a mix of resources ill-suited to the underlying needs of the system. This is especially true in a low-carbon power system, where the difference in value between flexible and inflexible resources is becoming increasingly acute. Furthermore, it obscures the true value of energy storage and flexible demand as supply becomes increasingly variable. As a result, the business case for innovation is undermined and consumers face significantly higher costs.
Enabling energy prices that truly reflect real-time conditions in the electricity market plays a key role in ensuring least-cost reliability, delivering value for money, advancing innovation, and empowering consumers. More findings on this topic can be found in a RAP paper authored by Mr. Hogan entitled Hitting the Mark on Missing Money: How to Ensure Reliability at Least Cost to Consumers.