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

The Capacity Market is not a tax – it is a market‑based mechanism that funds reliable electricity capacity to keep the grid stable during peak demand or supply shortfalls. For commercial energy users the key question is how this system affects their cost base and whether it can become a source of income. In practice the market delivers a dual effect: a small, transparent charge on every bill and a measurable opportunity for businesses with dispatchable generation, demand‑side response or storage to earn predictable payments.

How the Capacity Market works

The Capacity Market was introduced under the Electricity Act 1989 and is overseen by Ofgem. It operates on an annual auction cycle where capacity providers commit to be available in a future delivery year (typically three to seven years ahead). The system is funded by a levy on all electricity customers, collected by suppliers and passed to the Capacity Market Settlement Office (CMSO). The levy is reflected on the supplier invoice as a line‑item called the "Capacity Market charge".

The charge on your bill

For most non‑domestic customers the charge is around £0.5‑£0.7 per MWh of electricity consumed, varying with the regional Transmission Network Use of System (TNUoS) and Distribution Use of System (DUoS) tariffs. The charge is calculated on the basis of your annual electricity consumption and appears as a separate entry on the bill, making it easy to track. While the absolute figure may seem modest, on a 5 GWh annual usage profile it translates to roughly £2,500‑£3,500 per year – a cost that can be offset if you qualify to bid into the market.

Who can participate

Any entity that can demonstrate firm, dispatchable capacity at the time of delivery is eligible. This includes:

• Traditional generators (gas, diesel, coal – though coal is being phased out)
• Battery storage systems
• Demand‑side response (DSR) aggregators that can curtail load on command
• Hybrid solutions that combine generation and storage

The eligibility criteria are set out in the Capacity Market Rules (2024) and enforced by Ofgem. Importantly, participation does not require you to own the asset – you can act as an aggregator or partner with a technology provider.

Bidding with backup generation and storage

Types of assets that can bid

• Backup generators – on‑site diesel or gas generators that can run for several hours. They are often already installed for resilience and can be repurposed for Capacity Market bids.
• Battery storage – systems of 1 MWh and above can provide rapid response, earning higher prices for short‑duration capacity.
• Demand‑side response – industrial processes that can be throttled or shifted, such as refrigeration, data‑centre cooling, or manufacturing lines.

TUS Group’s Flex Management platform currently oversees more than 150 GWh of flexible capacity across the UK, helping clients aggregate disparate assets into a single, market‑ready portfolio. Our experience shows that well‑managed portfolios can beat supplier projections by 20 % in the last 12 months, delivering additional revenue streams.

Revenue streams

When your asset clears the auction you receive a Capacity Obligation Trade (COT) payment for each MW of committed capacity. In the 2023‑24 delivery year the clearing price averaged £15‑£20 per MW per hour, equating to roughly £130‑£170 per MW per year. Payments are made quarterly by the CMSO, directly into the account of the capacity provider.

For storage, the market distinguishes between "short‑duration" (up to 4 hours) and "long‑duration" (4‑8 hours) products, with the latter attracting a premium. Battery owners can also capture value from the ancillary services market (frequency response), further enhancing returns.

Timing and payment

When payments are made

Capacity Market contracts are settled over the delivery year. Payments are triggered each quarter once the provider confirms that the capacity was available during the contracted periods. Availability is verified through telemetry and compliance reports submitted to NESO (the system operator) and the CMSO.

If an asset fails to deliver, penalties are applied – typically a reduction of the quarterly payment and, in severe cases, a charge of up to £10 per MWh of shortfall. This underscores the importance of robust monitoring and the value of a dedicated platform like TUS’s Yolk portal, which offers free, real‑time visibility of capacity performance and has helped clients achieve an average 27 % saving when switching suppliers.

Strategic considerations for finance directors

1. Cost‑benefit analysis – Compare the annual Capacity Market charge against the expected COT revenue. For a 2 MW backup generator, the charge might be £1,200 per year, while the revenue could exceed £250,000 over a 10‑year contract.
2. Capital versus operational expenditure – Existing on‑site generators can be repurposed with minimal capex, whereas new battery installations require upfront investment but may qualify for the UK’s Accelerated Capital Allowance (CCA) and the Climate Change Levy (CCL) exemption.
3. Regulatory risk – The Capacity Market rules are reviewed annually. Keeping abreast of Ofgem consultations and DESNZ policy updates is essential to avoid stranded assets.
4. Integration with other optimisation measures – Voltage optimisation projects typically deliver 5‑15 % savings with a 2‑3 year payback. Combining these with Capacity Market participation can improve overall energy cost efficiency.

Bottom line

The Capacity Market charge is a predictable line item on every commercial electricity bill, but it also opens a clear revenue path for businesses that can demonstrate reliable backup or flexible capacity. By leveraging existing assets, partnering with aggregators, or deploying storage, finance directors can transform a modest cost into a strategic income stream that supports long‑term resilience and sustainability goals. Engaging with a specialist provider such as TUS Group ensures you meet the technical and regulatory requirements while maximising the financial upside.

FAQs

[{'q':'What is the typical size of a Capacity Market contract for a commercial site?','a':'Contracts are usually awarded in 1 MW blocks, but you can bid for any multiple of 1 MW up to the total capacity you can reliably deliver.'},{'q':'How quickly are Capacity Market payments received?','a':'Payments are made quarterly after the CMSO validates that the contracted capacity was available during the reporting period.'},{'q':'Can I participate without owning the asset?','a':'Yes. You can act as an aggregator or enter a revenue‑share agreement with an asset owner, provided the combined portfolio meets the eligibility criteria.'}]