Capacitors are generally mounted close to an electrical contact set. You may have one in your distributor next to the points, you may have one next to a mechanical voltage regulator, you may have one by your fuel tank pickup sender, you may have one on your generator, etc.
Capacitors (or condensers - same thing) are like small batteries. They absorb power spikes quickly until filled, then they give the power back more slowly. This feature smooths out your system's power and saves contacts from burning. - Dave