Understanding how capacity market charges can impact your business

But what even is the capacity market, how do the charges work, and crucially, what can manufacturers do to get visibility and control over this growing cost?

Gaining expert analysis can help lift the lid on these charges. Not only will you uncover errors and inefficiencies, but you’ll be able to reclaim any incorrect costs from your supplier and regain control over your energy budget. You’ll also get an understanding as to what’s really involved in your energy invoice and why these errors so often go unnoticed.

The capacity market is a government-backed scheme designed to make sure there’s always enough electricity available to meet demand, especially during peak periods.

To make this happen, the system pays energy providers, e.g., power stations, solar/wind farms, battery storage sites and even some large businesses to be on standby to ramp up, or reduce generation or consumption when the grid is under pressure.

However, the cost of running this scheme doesn’t come out of thin air. It’s funded by energy users, including businesses, through a charge on your electricity bill. Your energy supplier passes this cost on, usually bundled under non-commodity, non energy, or system charges.

Think of it like paying a retainer to keep backup capacity ready, just in case. It helps keep the grid stable and avoids blackouts, but it also means an extra charge that many manufacturers don’t fully understand or actively manage.

The capacity market charges are not fixed fees, but tied to how and when your business uses energy. They are made up of two elements; obligation costs and operational costs.

Obligation costs: this is the cost of running the capacity auction and is charged based on consumption throughout the winter period (November to February) during the hours of 4-7pm. The price is based on an estimated annual consumption volume (EACV), calculated in kWh. It is initially charged using a forecast price and the EACV. That price is divided by the number of days in a year, then multiplied by the days in an invoice period. It will then be reconciled for pass-through contracts using actual consumption and price when known. 

Operational costs: reflects the running costs of the scheme and are set by the electricity settlement company. This is billed on an ‘initial monthly forecast rate’ between April and March and is reconciled the following November. 

The demand-driven structure means that manufacturers with high, inflexible energy use during peak times tend to face bigger capacity market costs. The good news? With the right insight, there’s an opportunity to manage when and how you use energy.

For manufacturers, understanding capacity market charges can make a real difference to bottom lines and help with better decision-making.

Here’s why it matters:

For example, one manfuacturing client saw capacity market charges add over £50,000 a year across multiple sites until we helped them put proactive measures in place.

Businesses that understand and manage these charges can control costs and improve financial predictability.

There are some practical ways manufacturers can actively manage and reduce capacity market charges meaning you can turn them from an uncontrollable cost into an opportunity to increase your bottom line.

Load shifting and peak avoidance: One of the easiest ways to cut capacity market charges is to reduce energy use during peak perods. By shifting non-essential processes to quieter times of the day, or avoiding energy-intensive activity during high-demand windows, businesses can ease pressure on the grid and lower their costs in the process.

Demand-side response (DSR): Under the DSR scheme, businesses can decrease or shift their electricity use to help balance the grid. In return, they can receive financial incentives, lower bills, reduce their carbon footprint and play an important role in the transition to a low-carbon system.

DSR is often underutilised and not well-known but it can be a win-win for those businesses who can take part.

Check for exemptions or relief: Some businesses, particularly those in certain industrial sectors or operating under climate schemes, may qualify for relief from capacity market charges. It’s good practice to regularly review your eligibility with your energy advisor as the qualification criteria for such schemes change regularly.

Expert monitoring & forecasting: Real-time monitoring tools like Energy Insights help you to see what areas of your business are consuming electricity during peak periods and react/forecast accordingly. This will help if you want to load shift, look into DSR or utilise peak avoidance.

An invoice validation service, such as Businesswise Solutions’ Bureau Services, will also be able to check your invoices and ensure that any exemptions or capacity market charges have been applied correctly.

The capacity market charge may be one line on your energy invoice but it can have a big impact on profitability. For manufacturers, proactive management is key, not just to control costs, but to improve forecasting and financial resilience.

With the right strategy, based on clear data, expert insight and smart operational planning, capacity market charges can be minimised, eliminated, or even turned into an opportunity to generate extra revenue.