The net capacity factor of a power plant is the ratio of the actual output of a power plant over a period of time and its output if it had operated a full capacity of that time period. This is calculated by totaling the energy the plant produced and dividing it by the energy it would have produced at full capacity. Electrical energy is usually measured in kilowatt hours, or megawatt-hours in the electrical industry. Kilowatts or megawatts alone are not units of energy. They are units of power. Energy is power multiplied by time. Capacity factors vary greatly depending on the type of fuel that is used and the design of the plant. The capacity factor should not be confused with the availability factor.

A base load power plant with a capacity of 1,000 MW might produce 648,000 megawatt-hours in a 30-day month. The number of megawatt-hours that would have been produced had the plant been operating at full capacity can be determined by multiplying the plant's maximum capacity by the number of hours in the time period. 1,000 MW X 30 days X 24 hours/day is 720,000 megawatt-hours. The capacity factor is determined by dividing the actual output with the maximum possible output. In this case, the capacity factor is 0.9 (90%).

There are two main reasons why a plant would have a capacity factor lower than 100%. The first reason is that it was out of service or operating at reduced output for part of the time due to equipment failures or routine maintenance. This accounts for most of the unused capacity of base load power plants. Base load plants have the lowest costs per unit of electricity because they are designed for maximum efficiency and are operated continuously at high output. Geothermal plants, nuclear plants, coal plants and bioenergy plants that burn solid material are almost always operated as base load plants.

The second reason that a plant would have a capacity factor lower than 100% is it that output is curtailed because the electricity is not needed or because the price of electricity is too low to make production economical. This accounts for most of the unused capacity of peaking power plants. Peaking plants may operate only a few hours per year or up to a several hours per day. Their electricity is relatively expensive. It is uneconomical, even wasteful, to make a peaking power plant as efficient as a base load plant because they do not operate enough to pay for the extra equipment cost, and perhaps not enough to offset the embodied energy of the additional components.

Load following power plants, also called intermediate power plants, are in between these extremes in terms of capacity factor, efficiency and cost per unit of electricity. They produce most of their electricity during the day, when prices and demand are highest. However, the demand and price of electricity is far lower during the night and intermediate plants shutdown or reduce their output to low levels overnight.

When it comes to solar power, wind power and hydroelectricity, there is a third reason for unused capacity. The plant may be capable of producing electricity, but its fuel, wind, sunlight or water, may not be available. A hydroelectric plant's production may also be affected by requirements to keep the water level from getting too high or low and to provide water for fish downstream. However, solar, wind and hydroelectric plants do have high availability factors, so when they have fuel available, they are almost always able to produce electricity.