Can photo library be moved to a time capsule

Yes. Please read Photos for Mac: Change where Photos stores your files.

If you decide to do that, you are likely to find Photos unacceptably slow.

Rather than move your Photos library to the TimeCapsule which, as John Galt said, is likely to be unacceptably slow, I'd open the Photos preferences and select the option to optimize mac storage under the iCloud button. If that doesn't provide enough free space look for files that don't require lots of read/write speed and move them off the internal drive. Since I'd rather leave all the HD space on TimeCapsule for backups I'd use an external hard drive to store these files. If you have a 13" MBA you can purchase a low profile SD Card made specifically for your computer and store the files on it. Be sure that TimeMachine backs up the card too.