The Capacity Market: How Britain Pays for Firm Capacity

The Capacity Market is Britain's insurance policy for electricity. It does not buy electricity; it buys the promise that electricity will be there. Power stations, battery operators and some large energy users are paid to be available at the moments the system is under most strain, typically cold, still winter evenings when demand is high and renewable output may be low. The government's statutory security of supply report states its purpose plainly: "The purpose of the CM is to ensure security of GB's electricity supply at least cost to consumers"¹.

The scheme is deliberately open about what it rewards. The same report confirms that "The CM is technology neutral"¹, so a gas plant, a grid-scale battery, an interconnector or a factory that agrees to switch off can all compete, provided they can offer firm capacity when it is needed. The cost of these payments is recovered from electricity bills, and Ofgem manages a Capacity Market cost allowance within the price cap as part of that recovery².

For a household, the Capacity Market is one of the quiet, structural charges behind the unit rate and standing charge on a bill. It exists because Britain is, in the government's own words, "a net energy importer with a high dependence on gas and oil"³, and because electricity demand is projected to rise by 50% as transport, industry and buildings decarbonise⁴. This page explains how the mechanism works, what it costs, how it differs across the UK, and what it means for a home trying to be more self-sufficient.

Paying for readiness rather than power used

The core idea of the Capacity Market is a separation between two things a household's bill normally bundles together: the energy you use, and the guarantee that it will be there when you want it. Wholesale markets pay for the first. The Capacity Market pays for the second. A provider that wins a capacity agreement is paid for being available during the delivery year, whether or not it is ever called on to deliver.

This matters because the plants that keep the system secure are often the ones that earn least from the wholesale market. A peaking plant that runs only a few hundred hours a year, or a battery that exists to cover the evening peak, cannot finance itself on energy sales alone. The Capacity Market gives that kind of asset a second income stream, paid for readiness. The government frames the whole scheme around that objective of security at least cost¹, and its technology-neutral design¹ is what allows storage, generation and demand-side response to compete for the same pot on equal terms.

For a householder, the practical significance is that some of what you pay funds headroom you never see and never directly use. That headroom is what stands between a cold, still evening and the electricity margins and shortfall notices that would otherwise arrive more often.

Two auctions, T-4 and T-1, for a single delivery year

Capacity is bought through auctions held ahead of the delivery year, and the two main auctions take their names from the gap between the auction and delivery. The T-4 auction, named for the four years between the two, is the main event: it gives new projects and existing plants a multi-year revenue line far enough ahead that a battery developer or a plant owner can commit to being there. The T-1 auction, held one year ahead, tops the picture up, picking up capacity that has emerged since the earlier auction and filling any gap left by projects that have dropped out.

The two-stage design serves two different needs at once:

• Long-term certainty is what makes new build possible; a developer financing a storage project needs to know there is contracted income stretching years into the future.
• Short-term refinement is what makes the outcome accurate; a year out, the system operator and government have a much clearer view of which plants are really closing, how demand is tracking, and how much capacity is genuinely needed.

The rules around how the resulting cost is treated are themselves subject to review. Ofgem consulted on a change to the Capacity Market Cost Allowance Methodology, the framework that determines how the cost of the scheme is allowed for within the price cap. The consultation drew one response, from an energy supplier, who noted they would have welcomed more advance notice of how the prospective new Capacity Market input changes would be structured². That is a small but telling detail: even the industry participants inside the mechanism want more warning about how its costs are calculated, because those costs flow straight through to bills.

The role of storage and flexibility

Because the Capacity Market is technology neutral¹, it has become one of the revenue streams that makes flexibility investable in Britain. A grid-scale battery can stack income from several sources, and a capacity agreement, paying for availability at times of system stress, is a foundation stone of that stack. The same openness applies to demand-side response, where large users are paid for being ready to reduce consumption when the grid is tight.

For households, this is where the Capacity Market touches the story of home energy directly. The growth of grid-scale battery storage and of long-duration storage is partly underwritten by capacity payments, and those assets in turn shape how much of the wind and solar output Britain can actually use. The scheme also sits alongside the arrangements for household demand flexibility, which pay homes directly for shifting consumption, a different mechanism with a similar logic: reward readiness and responsiveness, not just energy.

The limit to state clearly is that the Capacity Market pays for availability, not for decarbonisation. A technology-neutral auction will pay whatever offers firm capacity at the lowest price, and that can include fossil-fuelled plant. The scheme secures the system; it does not choose its fuel. The choices about which low-carbon technologies get built are made through other instruments, such as Contracts for Difference, which pay for clean generation rather than for firmness.

The margin issue this mechanism was designed to fix

The Capacity Market exists because of a structural problem in an energy system that is both liberalised and increasingly weather-dependent. Wholesale prices reward energy actually sold, but security of supply depends on capacity that may sit idle for most of the year. Without a separate payment, that capacity closes, margins tighten, and the risk of shortfall on the coldest evenings grows.

The scale of the challenge is visible in the wholesale market itself. Traded volumes in the GB wholesale power market fell in April to June 2025, but remained more than 25% higher than the equivalent 2024 period, having risen from a trough of 140TWh in October to December 2022¹. A market that trades at that scale, with that volatility, still needs firm capacity standing behind it, because the traded energy has to come from somewhere physical at the moment of delivery.

Looking forward, the pressure on margins grows rather than shrinks. The Climate Change Committee has factored in a 50% increase in demand on electricity, to reflect the expected increase from the decarbonisation of transport, industry and buildings⁴. More electricity demand growth from electric vehicles, heat pumps and data centres means the capacity that has to be secured is not a static quantity. Meanwhile the country's underlying energy position, a net importer with a high dependence on gas and oil³, means that much of the firmness in the system ultimately rests on imported fuel, a dependence explored in detail on where Britain's gas comes from and the UK energy supply pillar page.

Bill impact and how the allowance is determined

The cost of the Capacity Market reaches households through electricity bills, and the route runs through the price cap. Ofgem operates a Capacity Market cost allowance as part of the cap framework, so suppliers recover the cost of capacity payments from customers within the allowances they are given². That is why changes to the methodology matter: the allowance determines how much of the scheme's cost a supplier can pass through.

The methodology is not fixed. Ofgem's consultation on a change in Capacity Market Cost Allowance Methodology shows the framework being actively revised, and the single response it received, from an energy supplier asking for more advance notice of how the input changes would be structured², indicates the revisions were significant enough that even participants wanted longer to prepare. For a bill-payer, the takeaway is that this is a live, reviewed charge, not a legacy cost frozen in time.

What can be said firmly is the mechanism: capacity providers are paid, suppliers recover the cost, and Ofgem's allowance methodology governs how much of it reaches the capped tariff². The wider set of charges around the bill, including network costs, is covered on transmission and balancing charges.

Delivery obligations and capacity market notices

Winning a capacity agreement creates an obligation, not an option. A provider that has been paid for availability must be able to deliver when the system calls, and the mechanism for calling is the capacity market notice, issued when the system operator judges that the margin between available supply and expected demand has fallen tight enough to require it. Providers that fail to deliver when called face penalties, which is what gives the payment its meaning: it is a genuine contract for readiness, not a subsidy.

For households, a capacity market notice is not itself a power cut, and it is not the same as the planned power cut notice a network might issue for maintenance work. It is a signal to the industry that the safety margin is thin and that capacity providers are being called on. The sequence of signals that can escalate from tight margins to actual shortfall is described on the page about electricity margins and shortfall notices, and the work of keeping the system balanced minute by minute, a separate activity from the Capacity Market, is covered under balancing services and frequency response.

The security the scheme buys is therefore conditional. It depends on providers being able to deliver, and in a system where the UK is a net energy importer with a high dependence on gas and oil³, some of that deliverability rests on fuel supply chains that begin abroad. The gas supply emergencies framework exists precisely because firm capacity is only as firm as the fuel and infrastructure behind it.

Great Britain, Northern Ireland and the broader market

The Capacity Market is a Great Britain mechanism. Its stated purpose is the security of GB's electricity supply¹, which means England, Scotland and Wales. Northern Ireland's electricity system is part of the all-island Single Electricity Market with Ireland, operated separately, and households there are affected by that market's own capacity arrangements rather than by GB auctions. The details are on the page about energy supply in Northern Ireland.

Within Great Britain, the scheme does not allocate capacity by nation; auctions are GB-wide and capacity is secured for the system as a whole. But the geography of generation that stands behind the system is very unevenly spread. Under the Feed-in Tariff scheme, installed capacity was 77.80% in England, 12.24% in Scotland and 7.56% in Wales as of the latest quarterly figures⁵, a distribution consistent across recent reports, which recorded 77.79% in England at the end of 2024⁶ and 77.80% at the end of March 2025⁷. Those figures cover the FIT scheme specifically, not the Capacity Market, but they illustrate the underlying pattern: most of Britain's small-scale installed capacity sits in England, with Scotland and Wales holding smaller shares.

That unevenness is one reason the electricity transmission network and the interconnectors that link Britain to its neighbours matter so much. Capacity secured in an auction may be physically distant from the demand it serves, and the wires between them are part of what makes the promise deliverable. The national pictures are set out on the pages for energy supply in Scotland and energy supply in Wales.

How the Capacity Market fits with other schemes

The Capacity Market is one of several government instruments shaping what gets built and what households pay, and each pays for something different. Contracts for Difference pay low-carbon generators for clean energy produced. The closed Renewables Obligation still sits on bills from its years of operation. The Capacity Market pays for firmness: the guarantee that capacity exists, whatever the weather and whatever the time of day.

Public spending adds a further layer. The 2025 Spending Review set Great British Energy's total capacity at £4.0 billion, with £0.0 billion in guarantees⁸, a state-backed vehicle intended to invest in clean energy alongside the market mechanisms. The Capacity Market and Great British Energy are complements rather than rivals: one secures firmness through competitive auctions, the other deploys public capital into generation.

The scale of what these schemes are asking the construction and engineering industries to deliver should not be understated. Official guidance on retrofitting homes notes that "simple capacity limits within the construction industry mean it is not feasible to carry out this volume of building upgrades to all dwellings all at once"⁹. The same physical constraint applies in spirit to the wider energy transition: capacity, whether of firm generation, storage or the workforce that builds it, cannot be conjured instantly, which is precisely why mechanisms exist to pay for it years ahead of need.

Implications for household energy independence

The Capacity Market is a scheme for the system, not for the home, and it is worth being clear about what a household gets from it and what it does not change. What it provides is a lower probability of the lights going out on the coldest evenings, because someone has been paid to be ready. What it does not provide is any reduction in a home's dependence on the grid, on a supplier, or on the imported gas that still underpins much of Britain's firm capacity³.

Indeed, the charge runs the other way: a household that stays fully grid-dependent pays its share of the Capacity Market through its bills while remaining exposed to everything the scheme exists to insure against. The dependence is layered:

• The UK is a net energy importer with a high dependence on gas and oil³.
• The firm capacity that the Capacity Market secures often burns imported fuel.
• The meter through which every household connects to that system is one of around 45 million in the domestic sector¹⁰, each one a point of dependence on the national machine.

That is the honest framing for a household weighing its options. The Capacity Market makes the grid more reliable, and a more reliable grid is genuinely valuable to a home with solar panels and a battery, because it is the backstop for the hours when self-generation falls short. But the payments a home makes into the scheme buy no independence at all. Independence comes from the things a household controls itself: generation, storage, insulation and the ability to shift demand, the subjects covered across this site, starting from energy security and household independence. The Capacity Market will keep the grid standing; what a home builds itself determines how much it needs the grid to stand.