Reliability and the Missing Money Problem

Todd S. Aagaard; Andrew N. Kleit

doi:10.1017/9781108779159.004

4 - Reliability and the Missing Money Problem

Published online by Cambridge University Press: 24 February 2022

Todd S. Aagaard and

Andrew N. Kleit

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Todd S. Aagaard: Affiliation:
Villanova University Charles Widger School of Law
Andrew N. Kleit: Affiliation:
Pennsylvania State University

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Summary

Capacity markets are created to ensure that restructured electricity markets provide reliable service. Reliability requires that generation capacity in electricity markets is adequate to meet demand at all times, including during periods of peak usage. In a typical market, the reliability of supply is left to buyers and sellers to resolve through their transactions. Electricity markets, however, have their peculiarities. In particular, the missing money problem is a theory contending that features specific to electricity markets distort incentives for investment in generation capacity, impairing reliability. Potential sources of these distorted incentives include inelastic demand and supply, price caps, system reliability as a public good, the use of engineering-based reliability standards, and system operations. Missing money theories provide the general rationale for policies seeking to enhance the supply of capacity in electricity markets. Each of the potential causes of missing money has generated both support and critique and may have different implications for policy.

Type: Chapter
Information: Electricity Capacity Markets , pp. 37 - 53

DOI: https://doi.org/10.1017/9781108779159.004 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2022

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