‘Quid pro quo’ on data centre development expected after US backlash

The experts were commenting after opposition to data centre development fed into recent campaigning for, and voter decision-making in, the US midterm elections. CNBC said 56% of respondents to a poll it ran said data centres were a crucial or major factor in their voting decision.

The midterm election results delivered a significant shift in the balance of power in the US Congress, with the Democrats winning control of both the Senate and the House of Representatives. The Republican party had held a majority in both chambers prior to the elections.

The results prompted an immediate reaction in financial markets: the tech-heavy Nasdaq share index fell 5.5% on Thursday, as trillions of dollars were wiped off the stock value of the major listed tech companies, according to the BBC. The sell-off has spread to the Asian and European markets, amid investor concern that the change in control of Congress could lead to greater restrictions on AI and data centre development.

Data centre development in the US is strongly favoured by Republican president Donald Trump. Among other things, he has relaxed federal permitting requirements for such projects. His administration considers the expansion of data centre capacity in the US as essential to US national security, linking it to the ability of the US to remain at the forefront of AI development, amidst competition from China.

However, reports in the run up to the midterms, including from the Brookings Institution, Axios and Al Jazeera, highlighted public concern over the environmental impact of data centres, with concern over energy and water consumption, as well as over a lack of jobs for locals arising from their development. According to the reports, the concerns have prompted public protests and led some candidates – on both the Republican and Democrat side – to campaign specifically against new data centres being built in their area.

The issue has risen to prominence in the US amidst a sharp rise in the number of data centre projects in the pipeline. According to a tracker developed by market intelligence business Cleanview, there are 1,417 data centres currently operating, 564 more under construction, and a further 2,553 planned, with Virginia, Texas, Pennsylvania, Ohio and Georgia the states targeted the most for an expansion in operations. News From The States estimates that if all the new planned projects were completed, data centre power consumption in the US would increase by around 545% compared to current levels.

Lisa Middleton of Pinsent Masons said the backlash against data centre projects in the US provides context for a recent shift in UK policy on data centre development.

“Growing opposition to data centre development is rooted in the perception that communities local to where projects are sited are not benefiting from data centres being built and operated in their backyard,” Middleton said. “In the UK, the government has moved to recognise this with its data centre covenant.”

The data centre covenant sets out the headline terms of a deal the government is willing to strike with developers to facilitate new ‘strategic’ data centre projects. The government’s part of the deal centres on steps to enable those projects to gain speedy connection to Britain’s electricity grid. In return, developers are expected to meet a range of conditions – around energy and water consumption, heat capture, local investment and jobs, and access to computing power for ‘critical’ UK services like the NHS.

Middleton said: “The data centre covenant represents an evolution of UK government policy, building on the announcement of AI growth zones – an accelerator programme through which developers could expect support with obtaining grid connections and planning permission for projects within designated areas of the country. The new covenant, in addition to the government’s draft new national policy statement for ‘nationally significant’ data centre projects, maintains the government’s pro-development stance amidst the recognised need to develop AI infrastructure but reframes the policy position so that there is a more defined ‘quid pro quo’ to government efforts to support projects.”

“The covenant can also be viewed in the context of wider efforts being undertaken by UK authorities to weed out speculative projects from the grid connection queue, so as to support viable developments,” she added.

Richard Ford of Pinsent Masons, a data centre planning expert, said that the new obligations set out in the covenant “will need to be handled carefully” by project promoters.

“There will need to be clear separation of legitimate s106 planning obligations necessary to the development in planning terms which can be taken into account in the grant of planning permission and/or a DCO and separate, unrelated but ‘required’, community benefit packages which the covenant requires but which cannot lawfully be taken into account in granting the planning permission or DCO. This is a well-trodden issue in community benefit packages for energy consenting as it stands, but it still has to be handled carefully to avoid legal challenge.”

“In addition, applicants will need to be close to local policies, politics and objections, and pay close attention to neighbour impact, to avoid the kickback suffered in parts of the US. Specialist planning and public policy teams should be engaged by promoters in this respect.”

“The main concern for promoters is the amount of benefit that will be expected and whether cash flows will be able to cope. The varying nature of data centre applicants will mean some applicants are far more sensitive than others. Triggers for community benefit payments will be key, synchronising with occupational cash flow as far as possible,” he said.

Other policymakers around the world are taking similar steps to the UK. In Ireland, for example, data centres are only eligible for grid connection if at least 80% of their annual demand for energy can be met via renewable electricity generated in Ireland. In Australia, data centre developers already bear costs associated with connecting their facilities to the electricity network, while reforms are being developed that would require large data centres to make a greater contribution to the cost of shared grid upgrades necessitated or accelerated by their electricity demand.

Energy projects expert Ronan Lambe of Pinsent Masons said: “While other markets are linking data centre growth more directly to renewable procurement or grid costs, the immediate UK challenge remains access to grid connection capacity. With grid connections often years away, we are seeing growing interest in on-site and near-site generation and storage as bridging solutions.”

“The government’s data centre covenant reflects that reality, seemingly potentially including limited unabated gas generation for strategic projects. That sits uneasily with wider clean power ambitions, but pragmatically reflects the gap between securing future grid capacity and actually having power available today for sites of strategic value,” he said.

Jeremy Chang of Pinsent Masons, who advises on heat recovery projects, added: “If we are asking what benefits data centres can bring to their host communities, waste heat recovery is one area worth looking at. Where viable, it can reduce pressure on the electricity system by lowering data centre power demand for cooling and reducing the electricity needed by heat networks to generate low-carbon heat. It can also give consumers access to potentially lower-cost, low-carbon heat, helping address affordability as well as decarbonisation.”

“The wider point is that this debate is not unique to data centres. In the UK, the recent Energy Independence Bill reflects a growing focus on the benefits that communities hosting energy infrastructure receive. Increasingly, the question is not simply what infrastructure we need, but how we maximise the benefits it can bring to the communities around it,” he said.