Planning, land availability and construction costs remain significant considerations for datacentre developers. Increasingly, however, the critical issue is power.
With 315 datacentres reported as currently waiting for grid connections and overall demand for electricity continuing to rise, securing energy capacity has become one of the most important factors determining whether a project proceeds at all. To put it simply, the amount and size of datacentres vying for connection to the UK’s electrical grid is too high.
To address this problem for datacentres, the options are to increase the availability and supply of power and the infrastructure required to deliver it, or reduce the number and scale of datacentres requiring power. The availability of power and the infrastructure required to deliver it is increasing as part of the Great Grid Upgrade, meaning the supply side of the equation is being addressed. But this is a long-term solution and won’t fix the immediate pressures of this supply and demand equation.
Developer commitment fees
Ofgem has opted to try to reduce demand for electrical connections by proposing the introduction of datacentre commitment fees, that require large datacentre developments to commit significant capital when accepting a grid connection offer. The regulator hopes the requirement for such fees will help remove speculative projects that are occupying scarce network capacity, and the fee is expected to apply retrospectively to projects that already hold a grid connection. The public consultation on the proposed introduction of commitment fees is scheduled to close on 16 September. That raises an important question: will it distinguish effectively between projects which are viable and can stomach an upfront fee, and those which are not and cannot?
The backdrop to the Ofgem consultation is a grid connection system under substantial strain, with the government’s AI and digital infrastructure ambitions driving further demand for increasingly power-intensive facilities. For example, Ofgem has said datacentres account for around 73GW of power within the connection queue, which exceeds the UK’s peak national electricity demand by a considerable margin. This drive for delivery without the necessary infrastructure in place puts the sector in a difficult position.
The logic behind the proposed commitment fees is therefore understandable. Developers would be required to make an upfront payment equivalent to between 2.5% and 7.5% of average project costs when accepting a connection offer, with the fee returned when the facility is operational but forfeited if the project leaves the queue before completion. In principle, this should discourage developers from securing connection offers without a realistic prospect of progressing the scheme.
Nevertheless, the proposal risks oversimplifying the realities of datacentre development. Most projects do not simply move from grid offer to construction. Developers typically spend considerable time resolving planning issues, undertaking technical surveys, negotiating land rights, engaging with prospective operators and securing investment before significant capital is committed. Requiring substantial sums to be paid at an earlier stage may remove speculative projects, but it may also prevent viable schemes from advancing.
Additionally, if developers are required to commit substantial capital years before projects become operational, some may begin to assess opportunities elsewhere. Grid constraints are a challenge across Europe, but investors ultimately compare locations on the basis of cost, certainty and speed of delivery. While these proposals alone are unlikely to drive developers overseas, they could influence those already deliberating a move, deterring investment and contradicting the government’s pledge to make the UK an AI leader.
Behind the meter strategies
Another consequence may be a growing shift towards alternative power strategies. Interest in behind-the-meter or private wire arrangements has increased significantly as developers seek greater certainty over power availability.
Rather than relying exclusively on a conventional grid connection, operators are increasingly exploring opportunities to source electricity directly from private generation assets, including solar farms and dedicated gas-fired generation, supported by large-scale on-site storage. Initially, these arrangements were viewed as a temporary means of overcoming connection delays but increasingly they are becoming a central part of development strategy.
Behind-the-meter solutions, however, come with their own complexities and are not a straightforward substitute for a grid connection. Datacentres require continuous and highly reliable power supplies that renewable energy alone cannot always provide, particularly with the levels of resilience required by facilities operating around the clock. As a result, many developers are exploring hybrid solutions that combine private generation assets with conventional, reduced, grid connections, battery storage and backup generation – not to avoid the grid altogether but to reduce dependence upon it.
From a legal perspective, this introduces additional complexity in securing power supply agreements or further land rights for connection infrastructure, and makes it important for developers to ensure regulatory compliance in the supply of electricity and avoid long-term operational risk – all of which become increasingly important components of project development.
Don’t wait and see
The consultation on the introduction of datacentre commitment fees does address other alternatives, including the phased return of commitment fee capital as schemes reach defined milestones, allowing developers to demonstrate progress before recovering portions of their investment. Another possible option is milestone-based payment requirements, where additional financial commitments are triggered as a project advances, rather than requiring a substantial upfront payment. These approaches could provide a more proportionate means of distinguishing between non-viable schemes and genuine developments that require time to secure planning permission, financing, customers and land rights.
Whilst the consultation remains ongoing, adopting a wait-and-see approach is not an attractive option. Existing projects should be reviewed to understand the potential impact of commitment fees and to assess whether alternative energy strategies could support future developments. It’s also important for developers to consider contributing to the consultation process itself. There may be scope for a more balanced approach that the industry could advocate for, such as phased returns of capital or milestone-based requirements, which distinguish between speculative and genuine projects without creating unnecessary barriers to investment.
The challenge is to ensure that measures designed to remove non-viable projects do not discourage the investment needed to support the UK’s digital economy. As demand for AI infrastructure continues to grow, access to power is rapidly becoming as important as access to capital. How the regulator chooses to balance those competing pressures may have a significant influence on the future direction of the UK’s datacentre market.
Peter Dilks is energy and real estate partner at law firm Shakespeare Martineau.
