Capacity Market (CM) costs explained
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The information in this video and article was accurate as of 1 April 2025. We update our TPCs Explained hub every Spring to reflect any changes.
What is the Capacity Market?
The Capacity Market (CM) supports the security of Great Britain’s energy system by ensuring the country has enough generation capacity to meet peak demand needs. It does this via auctions, by paying generators and other dispatchable assets to be available to supply electricity or reduce consumption when needed.
The CM applies a ‘de-rating factor’ to all generation assets and demand side response (DSR) activities depending on their expected availability over peak demand periods. Less controllable (or more intermittent) assets are typically less available, and therefore get a more significant de-rating.
Despite this, it’s regarded as a technology-neutral scheme that accounts for the likelihood of different generation types being available over the winter peak.
How does the Capacity Market work?
The Government sets how much generation capacity the UK will need, with advice from the National Energy System Operator (NESO), years in advance of when it will be used. The CM procures this capacity over two separate auctions:
- T-4 (T minus 4) – this auction occurs 3.5 years ahead of the delivery year; it procures most of the capacity requirement
- T-1 (T minus 1) – this auction occurs 6 months or so ahead of the delivery year, and procures any additional capacity in addition to the T-4 auction
The scheme pays for technologies to be available in each CM year (from October to September) and then dispatches the assets as they’re needed. In return, providers must deliver when called upon – or face penalties.
How much of your energy bill does the Capacity Market account for?
For a typical low voltage energy consumer, the CM charge is expected to make up around 5% of the bill in 2025. However, this will be affected by the type of customer, location, and consumption over the peak period, as we will come on to.
How are Capacity Market costs recovered?
CM costs incurred are based on demand during winter, over the peak periods. But the charge is recovered by suppliers every month of the year based on forecast peak demand and reconciled demand. The CM costs are recovered in two key ways:
- A CM Supplier Charge covers the payments to capacity providers
- The electricity settlements company incurs a Settlement Levy Payment covering operational costs
Will you know about Capacity Market costs in advance?
The annual cost is calculated by multiplying the procured capacity by the auction price, and adjusted for applicable inflation. This allows for good visibility of the scheme's annual costs ahead of the delivery year.
However, the £/MWh charge is much less well known, as the total demand over chargeable periods (4-7pm on weekdays from November to February) can vary substantially.
What drives the Capacity Market charge?
The main drivers of the CM charge are:
- The auction clearing price for the relevant T-4 and T-1 auctions
- The capacity procured during these auctions, minus any capacity that subsequently has its contract terminated
- The chargeable demand over which the cost is spread
To learn more about the other TPCs in your energy bill, head to our TPCs explained hub using the button below. Or, to understand more about electricity prices, download our latest bi-annual Electricity Prices Explained guide.
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