The Missing Money Problem

Electricity markets contain one of the strangest puzzles in modern economics. It’s called the Missing Money Problem, and it revolves around a simple question: if electricity is essential for modern life, why is it often unprofitable to build power plants?

To understand the puzzle, consider how electricity markets are designed. Power plants bid into a market every hour saying how much electricity they can produce and at what cost. The cheapest producers—usually nuclear, hydro, or efficient natural gas plants—get selected first. More expensive plants only turn on when demand rises. In theory, this competitive process should ensure enough electricity is always available. Prices should rise during peak demand, allowing producers to recover their investment costs.

But reality behaves differently. Governments often cap electricity prices to prevent consumers from facing extremely high bills during shortages. Politically, this makes sense. Economically, it creates a strange distortion. Power plants rely on occasional price spikes—those hot summer afternoons when everyone turns on their air conditioner—to make enough revenue to justify their existence. If those spikes are limited by regulation, the revenue disappears.

The result is the “missing money.” Power plants still provide essential backup capacity during peak demand, but the market does not pay them enough to cover their long-term investment costs. Investors hesitate to build new plants because the financial incentives are too weak. Ironically, a system designed to ensure reliable electricity can gradually undermine the incentives needed to maintain reliability.

To fix this, some regions created “capacity markets.” Instead of paying plants only for electricity they generate, the system also pays them simply for being available when needed. It’s like paying firefighters not just for putting out fires, but for maintaining a fire station ready to respond. The economy quietly recognizes that some services must be funded for readiness, not just usage.

The story reveals a deeper truth about infrastructure economics. Markets work beautifully for goods that are bought and sold continuously. But systems that must always be available—electric grids, emergency services, water networks—operate under different logic. Society isn’t just buying electricity in those moments; it is buying reliability itself.