The UK Capacity Market: costs, earnings and opportunities for businesses

The capacity market is a cost‑and‑opportunity layer on every commercial electricity bill

The Capacity Market exists to guarantee that the UK can meet peak demand, even when intermittent renewables fall short. That guarantee is funded through a levy on all electricity customers – a line item that appears on the bill as a small per‑kilowatt‑hour charge, typically around 0.5 p/kWh. While the amount seems modest, on a 10 MW demand portfolio it translates to roughly £5,000 per year, a figure that can erode profit margins if left unmanaged.

From a strategic perspective the market is not just a cost; it is a platform where businesses that own dispatchable assets – gas‑fired generators, diesel backup, or battery storage – can bid to be called upon during scarcity events. Successful bids generate capacity payments that are paid out annually, often covering the full levy and delivering additional profit. The core thesis for senior finance and operations leaders is simple: treat the Capacity Market charge as a signal of an untapped revenue source rather than a pure expense.

How the Capacity Market charge appears on your bill

The levy is collected by the electricity supplier on behalf of the Capacity Market and passed to the Capacity Market Operator (CMO). It is calculated on the basis of a firm’s contracted demand, measured in megawatts (MW). For example, a retailer with a contracted demand of 5 MW will see a charge of roughly £2,500 per year (5 MW × £500 per MW, the current CMO price). The charge is reflected in the supplier’s invoice under the heading Capacity Market and is separate from the standard energy and network tariffs.

Why the charge matters to the bottom line

• Predictable cost – the levy is set annually by the CMO, so budgeting is straightforward.
• Regulatory compliance – non‑payment can trigger penalties under the OFGEM Electricity Market Reform framework.
• Opportunity cost – every pound paid could be earned back if the business can qualify as a capacity provider.

Who can bid into the Capacity Market

The scheme is open to any technology that can deliver firm capacity when required. The eligibility list includes:

• Gas‑fired combined‑cycle plants (up to 30 MW per unit)
• Diesel generators (typically up to 5 MW per unit)
• Battery storage systems (up to 50 MW, with a minimum 30‑minute discharge capability)
• Demand‑side response (DSR) that can curtail load on short notice
• Renewable‑plus‑storage solutions that meet the firm‑capacity definition

Backup generation

Traditional backup generators are the most straightforward entry point. If you already operate a diesel or gas‑fired unit for resilience, you can register it with the CMO and submit a capacity bid. The bid price is set against the market clearing price – currently around £15 / MW · day – and successful bidders receive an annual capacity payment that is indexed to inflation.

Battery storage assets

Battery storage is increasingly attractive because it can provide rapid response, a key requirement for the Capacity Market’s 30‑minute notice period. A 10 MW/20 MWh battery can bid the full 10 MW of capacity, earning the same £15 / MW · day as a generator, while also participating in energy arbitrage and ancillary services. For a typical commercial site, the net effect can be a 5‑15 % reduction in overall energy spend when combined with voltage optimisation – a saving that TUS has demonstrated with a 2‑3 year payback on similar projects.

When and how payments are made

Capacity payments are settled annually, usually in the spring following the delivery year. The CMO reconciles the total capacity called during the year against each provider’s contracted capacity. If your asset was called, you receive the full agreed payment; if not, you still receive a standby payment that covers the opportunity cost of keeping the asset available.

Timing of cash flow

• Year‑end reconciliation – payments are calculated after the delivery year ends (31 March).
• Quarterly instalments – many providers, including TUS, offer to forward‑pay a portion of the expected capacity revenue to improve cash flow, smoothing the impact of the levy.
• Tax treatment – capacity payments are treated as trading income and can be offset against the levy expense for corporation tax purposes.

Strategic considerations for finance directors

1. Asset sizing – The CMO requires a minimum capacity commitment of 1 MW. Smaller sites should consider aggregating assets through a third‑party aggregator such as TUS, which operates a 30+ supplier panel and manages over 150 GWh of flex capacity.
2. Performance risk – Failure to deliver when called results in penalties up to £200 / MW · day. Robust monitoring and remote dispatch systems are essential.
3. Regulatory alignment – The Capacity Market operates alongside other DESNZ‑mandated schemes such as the SECR and CCL. Coordinating bids can maximise overall energy‑cost optimisation.
4. Opportunity cost of capital – Capital‑intensive generators require longer payback periods (5‑10 years), whereas battery storage can achieve a 2‑3 year payback when combined with voltage optimisation and energy‑price arbitrage.

Leveraging TUS expertise

TUS Group’s Flex Management platform can integrate your backup or storage assets into the Capacity Market without the need for in‑house expertise. By pooling resources across a 30+ supplier panel, TUS has consistently beaten supplier projections by 20 % in the last 12 months, delivering higher capacity utilisation and revenue. The free Yolk portal also provides real‑time visibility of capacity commitments, payments and performance metrics, enabling finance teams to reconcile the levy against earned income on a monthly basis.

Bottom line

The Capacity Market levy is a small, predictable cost that can be turned into a revenue stream if your business owns or can aggregate dispatchable assets. By registering generators or batteries, you not only offset the charge but also gain a new income line that improves overall energy economics. Leveraging specialist partners such as TUS can accelerate market entry, reduce risk and ensure that the capacity payments are captured efficiently, protecting your margins while supporting a resilient UK electricity system.