The UK Capacity Market — what it costs you, what it earns you
The UK Capacity Market is a critical mechanism for ensuring grid stability, but it directly impacts business energy bills through the Capacity Market charge. This article explains how the charge appears on your bill, who pays it, and how businesses with backup generation or storage can participate to generate income. It also outlines when participation makes financial sense.
The UK Capacity Market — what it costs you, what it earns you
The UK Capacity Market is not a direct cost to your business in the way a fuel bill is, but it is embedded in your energy charges through the Capacity Market charge, which appears on every electricity bill. This charge ensures that sufficient generation and demand-side response capacity is available to meet peak demand and avoid blackouts. For businesses, this means a direct, recurring cost — but also a potential revenue stream if you can participate as a provider. Understanding how it works is essential for both cost control and strategic opportunity.
How the Capacity Market Charge Appears on Your Bill
The Capacity Market charge is collected via your electricity supplier and passed through to the NESO (now NESO), which manages the market on behalf of the government. It is included in your supply charge and appears as a line item on your invoice. The charge is calculated based on your contracted demand (in kW) and the annual capacity price determined through auctions. For example, in the 2025/26 auction, the clearing price was £17.20/kW/year — meaning a business with a 1MW contracted demand pays approximately £17,200 annually in Capacity Market charges, regardless of actual consumption.
This charge applies to all non-domestic consumers with a contracted demand of 100kW or more. It is not a tax, but a market mechanism designed to incentivise investment in capacity. However, it is often overlooked in energy budgeting, leading to unexpected cost increases. The charge is not subject to VAT and is not eligible for energy efficiency incentives or tax credits.
Who Can Bid in the Capacity Market?
While most businesses pay the charge, some can also earn income by bidding into the market as capacity providers. This requires having a resource that can deliver power during peak demand periods — either through on-site generation (e.g. diesel, gas, CHP) or demand-side response (DSR) via storage, load shifting, or flexible plant. The Capacity Market is open to a wide range of assets, including battery storage, industrial processes that can be temporarily curtailed, and even combined heat and power (CHP) systems.
To participate, assets must be registered with NESO and meet technical requirements for reliability and availability. The process involves submitting bids in annual auctions, with successful bidders receiving payments for being available to deliver power when needed. The UK has run multiple auctions since 2014, with the latest being the 2025/26 auction, which cleared at £17.20/kW/year. The payment is made in advance, based on the capacity commitment, and is not dependent on actual delivery — though penalties apply if a bidder fails to deliver when called upon.
How Businesses with Storage or Backup Can Earn
For businesses with battery storage or backup generation, the Capacity Market offers a significant revenue opportunity. TUS has helped clients with battery storage systems earn between £15,000 and £35,000 annually in Capacity Market income, depending on size and location. A 1MW battery system, for example, can earn up to £17,200 per year at the 2025/26 clearing price — effectively offsetting the cost of the battery over time.
The key to profitability is not just participation, but integration with other energy strategies. TUS’s Yolk platform enables clients to combine Capacity Market participation with real-time trading, demand-side response, and voltage optimisation. This integration has delivered average switching savings of 27% and reduced overall energy spend by up to 20% in the last 12 months. For a business with a 1MW contracted demand and a 500kW battery, the combined effect of reduced bills and Capacity Market income can result in a net annual saving of £25,000–£40,000.
When Does It Pay to Participate?
Participation in the Capacity Market is only financially viable for assets that can reliably deliver capacity when called. This includes:
- Battery storage systems with at least 500kW capacity and 2-hour duration
- On-site generation with a minimum of 100kW and 90% availability
- Industrial processes with load-shifting capability (e.g. cooling, compressors)
- Demand-side response aggregators with multiple assets
The decision to bid should be based on a detailed assessment of availability, dispatch frequency, and opportunity cost. TUS has managed over 150 GWh under flex management, with a track record of beating supplier projections by 20% in the last 12 months. Our analysis shows that only 30–40% of eligible assets achieve positive net returns, primarily due to poor dispatch planning or technical limitations.
Regulatory and Market Context
The Capacity Market operates under the UK’s Electricity Market Reform (EMR) framework, governed by DESNZ and administered by NESO. It is designed to ensure security of supply through 2030 and beyond, with auctions held every two years. The 2025/26 auction was the latest in a series that includes the 2023/24 and 2021/22 rounds.
Regulatory changes are ongoing. The introduction of the Capacity Market Review in 2023 has led to tighter eligibility criteria, particularly for peaking plants and older technologies. New entrants must now demonstrate low carbon emissions or grid support value. This has increased the importance of integrating capacity with low-carbon assets like batteries and demand-side response.
Bottom line
The Capacity Market charge is a direct cost for most UK businesses with significant electricity demand, but it also represents a strategic opportunity. For businesses with storage, backup generation, or flexible loads, participation can generate meaningful revenue. The key is not just eligibility, but integration with broader energy strategies. TUS’s experience shows that combining Capacity Market participation with demand-side response, voltage optimisation, and real-time trading can deliver net savings of 20% or more. The decision to bid should be based on a detailed technical and financial assessment — not on assumptions about market returns.
FAQs
How is the Capacity Market charge calculated?
It is calculated as your contracted demand (in kW) multiplied by the annual clearing price from the latest auction. For example, a 1MW site at £17.20/kW/year pays £17,200 annually. The charge is not based on actual usage.
Can small businesses participate in the Capacity Market?
Only businesses with a contracted demand of 100kW or more are subject to the charge. Participation as a provider requires a minimum of 100kW of deliverable capacity, typically through battery storage, CHP, or industrial load shifting.
How much can a battery storage system earn in the Capacity Market?
A 500kW battery system can earn up to £8,600 annually at the 2025/26 clearing price of £17.20/kW/year. With integration into broader energy strategies, total annual returns can reach £15,000–£35,000 depending on dispatch frequency and market conditions.
The UK Capacity Market — what it costs you, what it earns you — quick questions
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