The missing money problem: Incorporation of increased resources from wind in a representative US power market

The paper considers opportunities to reduce emissions of CO2 through increases in commitments to wind in a representative US power market. A model is applied to simulate market operations for different wind levels focusing on implications of the reduction in clearing prices arising due to increasing inputs of zero marginal cost power from wind, a dilemma referred to as the missing money problem. The resulting decrease in income poses problems for existing thermal and nuclear generating systems, at the same time making investments in wind uneconomic in the absence offsetting policy interventions. Two options are considered to subsidize cost: an investment credit (IC) or a subsidy on production (PC). The dilemma could be addressed also with a carbon tax targeted to increase income. It is assumed that the cost associated with the IC and PC options should be borne by the consumer, offsetting benefits from lower wholesale prices. It is assumed further that income from the carbon tax should be rebated to the consumer offsetting related increases in clearing prices. IC and PC options offer opportunities to reduce emissions at low or even negative net costs to the consumer. Higher costs are associated with the option of a carbon tax.