Ofgem targets ‘speculative’ data centre projects in bid to cut grid connection queue

Ronan Lambe and Alasdair MacDonald of Pinsent Masons said Ofgem’s proposals (86-page / 1.74MB PDF), which are open to consultation until 16 September 2026, are material to data centre developers behind both future and existing projects.

According to Ofgem, data centre developers are behind a “surge” in applications for grid connection in Britain. It said it saw contracted demand offers increase from 41GW to 125GW between November 2024 and June 2025, with at least 80GW of that total linked to data centre projects. Ofgem currently estimates that there are 315 datacentre projects in the connection queue, representing 73GW of demand. For comparison, in the year 2025/26, total demand for electricity peaked at 45GW.

In its consultation paper, the regulator cited a range of factors that it said is contributing to “speculative” data centre projects making grid connection applications. Those factors include the increase in the value of land that can be realised once planning permission and a grid connection offer are secured, as well as how “inexpensive” it is to obtain a connection offer and hold a queue position without ever being obliged to develop the project.

Ofgem said that if non-viable projects clog up the system, it could delay “viable developments” as well as create “misleading signals about future network investment needs”.

To address the issue, Ofgem intends to introduce a data centre commitment fee. The fee would need to be secured in full by developers “from [grid connection] offer acceptance”. That security would only then be returned “at energisation”, with developers whose projects terminate before then unable to recover the fee. A grace period and some limited exemptions from the fee have been proposed by the regulator.

Ofgem has developed a formula for calculating the fee that would be payable by developers in each case. That formula takes account of the project’s capacity in megawatts (MWs) and capital expenditure, as well as the average capital expenditure per MW of building a data centre. The regulator’s assumptions are that developers will pay between £237,500 per MW to £712,500 per MW when the new commitment fee is levied. This is in addition to sums required to be provided by the developer to NESO to secure final sums liabilities – costs associated with terminating connection agreements pertaining to Britain’s transmission network.

For hybrid projects, where data centre development forms only part of the project for which grid connection is sought, Ofgem intends to apply the data centre commitment fee “only to the capacity requested for the data centre component of the project”.

“Some developers hold multiple projects in the queue whilst being unlikely, unable, or lacking intention to develop all of them,” Ofgem said. “While each individual project may be viable, introducing a fee will incentivise developers to reduce their portfolio of queue projects at an earlier stage, so that it better reflects their broader capacity, financial and otherwise, to build and develop data centres. In addition, it may also incentivise developers to ‘right size’ their requested connection.”

In addition to imposing the new fee, Ofgem intends to introduce new data centre queue management milestones “to help ensure that projects holding network capacity are making genuine progress towards delivery”.

The proposed milestones are designed to reflect “the development cycle of data centre projects”, Ofgem said, and would require developers to provide evidence of agreements with “compute offtakers”, their long-lead procurement – such as purchase of certain electrical equipment, as well as evidence of their financial backing or creditworthiness – such as a bank letter of credit, as different milestones arise.

Developers that fail to show evidence of having met the milestones in time face having their projects “ejected from the connection queue”, Ofgem said.

Ronan Lambe of Pinsent Masons said: “Proposals which result in viable projects being brought forward at the expense of speculative projects are broadly to be welcomed given the size of this queue. One worries, however, that the combination of potential additional cost and the need to demonstrate a compute customer may lead to some developers concluding that the challenges of data centre development in the UK come with too much cost and risk – in particular, those whose model involves packaging land, planning and grid and marketing data centre opportunities to hyperscalers. It would be a backwards step for the UK’s economy if these proposals had the effect of reducing the investment case in this particular category of critical national infrastructure.”

“In addition, the reforms being consulted on represent only a small step in the direction of enabling greater development of data centres as other barriers still exist including grid reinforcement costs, planning delays and supply chain issues,” he said.

Alasdair MacDonald, also of Pinsent Masons, added: “Developers, including those with existing grid connection offers, need to be aware of the potential introduction of the data centre commitment fee and how this introduces an additional cost to the development of data centres. Developers are advised to consider Ofgem’s proposals, in particular the proposed grace periods and exemptions, and ensure timely responses to the consultation.”