Demand for data centres offers UK real estate opportunity

Pinsent Masons has teamed up with US law firm Husch Blackwell, specialists in advising on data centre development across the US, to explore common issues that can constrain data centre development on both sides of the Atlantic – and highlight features of developing in the UK that owners of and investors in UK real estate should consider when seeking to attract major data centre operators, which are looking to the UK market for growth, to their sites.

Electrical power and access to other utilities

In both the UK and US, data centres are expected to account for an increasing proportion of energy use over the coming years.

According to National Grid, the operator of Britain’s electricity grid, in 2022, data centres accounted for 2.5% of the UK’s electricity consumption. Earlier this year, however, John Pettigrew, chief executive of National Grid, said demand for power to feed commercial data centres is expected to grow six-fold over the next decade. In the US, the Electric Power Research Institute (EPRI) recently estimated that data centres will consume 9% of the total electricity generated in the country by 2030.

Access to power is a crucial driver in respect of the siting of any data centre – on both sides of the Atlantic. In many cases, it eclipses other factors that play into the viability of other forms of real estate development in terms of its importance, such as the availability, size, or cost of land.

Challenges in accessing power and other utilities necessary to operate data centres in certain parts of the US is reflected in EPRI data that shows that around 80% of US data centre power consumption in 2023 was concentrated in just 15 of the country’s 50 states. This reflects that while there are vast regions of the US where there is a surplus of land available to develop data centres relatively inexpensively, data centre projects are simply not viable in those locations because of problems in accessing utilities – most notably, power.

It is common for data centre operators in the US to develop neighbouring power generation as part of their projects, to directly power their data centres – and seek to do so using low-carbon sources of electricity. However, this has given rise to other challenges.

For example, plans to use water to cool data centres – or install hydroelectric generation plants to power their operation – can prove difficult to gain approval for in areas of the country where water resources are scarce. Even in areas around the Great Lakes in the north east of the US where there is a plentiful supply of water, we have seen intense media and public scrutiny over water pacts agreed by data centre operators and communities that sit on different sides of the subcontinental divide, which concern the transfer of water resources across the divide to power data centres.

In a UK context, real estate owners, developers and investors seeking to attract data centre operators to their sites need to consider the ease with which their sites offer access to electrical power and water.

In relation to water, Savills has estimated that a data centre may use up to 26 million litres of water each year, on average, per megawatt. Pressures on water supplies can arise in summer months in parts of the UK – particularly in the southeast where there is typically higher temperatures and less rainfall – and Thames Water last year acknowledged that it could restrict data centres’ access to water during periods of extreme drought.

In relation to access to electrical power, a core consideration is the ease with which data centres can be connected to the electricity grid in Britain.

To-date, much of the data centre development in the UK has been concentrated in and around London, but in its latest data centre cost index, Turner & Townsend highlighted that “continued planning and power constraints in London” mean there is likely to be an increasing focus on data centre development in other areas of the UK, such as around Manchester and Cardiff.

The pressures that data centres could place on Britain’s electricity grid in the years ahead have been acknowledged by the National Grid’s Pettigrew. He has pointed to the need for “innovative thinking and bold action” to enable the currently “constrained” grid to cope with increased demands for power in the future – not just from data centres, but from growth in the use of electric vehicles and heat pumps too.

The reality is that Britain’s electricity grid infrastructure is old and was not built with current generating sources, use cases or demand levels in mind. There are simply not enough grid connection points around the country to accommodate new renewable generation and power-hungry development projects. As a result, it has been common to see delays in data centre projects becoming operational because they are in a queue to obtain connection to the grid. This is a problem that is not unique to data centre projects – there is a backlog in grid connection work across all types of development – but delay can impact on the commercial viability of a project as well as operational delivery timescales.

National Grid is seeking to address this problem, essentially by weeding out projects from the grid connection queue that have failed to deliver on other aspects first but, to-date, it has been one of the reasons why we have seen developers seeking to situate data centres in locations where there is ready access to power – whether near existing sources of generation, such as wind farms or energy-from-waste projects, to which they may connect via ‘private wire’ connections or where an already established grid connection, such as that for a decommissioned power plant, can be re-used and capacity secured.

With the National Grid’s plan for cutting delays to grid connection in mind, there is an opportunity for real estate owners, investors, and developers to enable faster grid connections for their projects – by being sufficiently organised to have secured relevant planning permissions, permits, and land use rights, before seeking grid connection. By doing so, they have a better chance of skipping the queue and gaining priority status for grid connection works, where those are available.

The strain which data centre development can place on national electricity grids is arguably no better evidenced than in Ireland. Last year, data published by the Central Statistics Office in Ireland revealed that almost a fifth of electricity used in Ireland in 2022 was consumed by data centres. That reflects the fact that some of the world’s most data-rich companies across the technology and pharmaceutical sectors have their European headquarters in Ireland. The pressures this is placing on Ireland’s electricity grid has prompted regulatory change.

In 2021, the Commission for Regulation of Utilities (CRU) issued directions to the operators of Ireland’s electricity grid requiring them to assess data centre grid connection applications against set criteria “to determine whether a connection offer can be made within the system stability and reliability needs of the electricity network”.

Relevant criteria includes where a data centre is located, and whether that location is “within a constrained or unconstrained region of the electricity system”; the ability of data centre developers to access onsite power generation, or storage, that is at least equal to their power demands; and whether the data centre’s energy consumption can be reduced in times of system constraint.

At this stage, there is no suggestion of similar regulation being introduced in Britain, but businesses can be sure that policymakers and regulators will be monitoring growth in the data centre market – and that all options would be given serious consideration if intervention was deemed necessary.

Grid infrastructure modernisation is a longer-term project in Britain and sits alongside plans to decarbonise the electricity grid. In 2023, more than half of the UK’s energy was generated from low-carbon sources like renewables and nuclear, with the government’s target being to achieve 100% zero-carbon generation by 2035. It means that, while there are challenges to overcome, data centre operators connecting to the electricity grid in Britain can be increasingly confident that the electricity they use is ‘clean’ – something that is important amidst the intense focus on what businesses are doing to operate sustainably and address the climate emergency.

Planning

Recent data published by construction data company Glenigan provides evidence of the growing demand for data centre development in the UK. Glenigan said there are 62 data centre or IT processing schemes either at pre-planning stage or in the planning system currently – including plans for what would be the largest UK data centre to-date, the Humber Tech Park at Immingham on Humberside.

Very large data centre proposals in England – i.e. those that can be regarded as being of national significance – are capable of being given planning and other consents through the Planning Act 2008’s Development Consent Order (DCO) route, which mainly applies to nationally significant energy, transport and water infrastructure projects. Such data centre proposals, either alone or as part of a mixed-use development not including housing, are able to ask the UK government to designate the proposal as a Nationally Significant Infrastructure Project (NSIP) and then consent it through a DCO, which can incorporate the renewable power generation, grid connection and other utility supplies, as well as land powers, within the single consenting regime.

This consenting route involves applying directly to the secretary of state and the proposals are then examined in public by an appointed examining authority before being finally determined by the secretary of state.  However, to date this consenting route has not been tried and tested in seeking to deliver data centres and the support of the relevant local planning authority in relation to the proposed use of the consenting route would be very important to secure.

For smaller scale data centre schemes in England, planning applications are subject to the process outlined in the Town and Country Planning Act 1990. Under that regime, decision-making powers initially rest with local planning authorities (LPAs) – they can approve, reject, or decide not to take any action in respect of planning applications.

In the latter case, after a certain period of non-determination has elapsed, applicants can request that their application is considered by the secretary of state at national level. In those cases, a planning inspector from the Planning Inspectorate is typically appointed to consider the application in the case on behalf of the secretary of state, although the secretary of state does have powers to ‘call-in’ the application for determination themselves when the application is before the local planning authority but has not been determined.

It is our experience that planning authorities’ receptiveness to data centre development can vary across the UK and be influenced by prevailing political issues and motivations of the day. This can cause uncertainty for real estate owners, investors, and developers hoping to obtain permission to develop data centres in the UK.

The political environment has, however, recently changed in the UK. The new Labour government has already elaborated on its manifesto commitment to deliver planning reforms to enable faster delivery of new infrastructure and housing by issuing a consultation on updating the National Planning Policy Framework (NPPF), and alongside this it is also seeking views as to whether or not to allow planned data centres under the NSIP threshold to opt in to the Planning Act NSIP regime.

The NPPF update appears likely to deliver integrated consents and deliverable solutions with greater certainty, for example underground data storage solutions integrated with energy generation and complementary development such as heat networks for residential development. This offers real prospect for the innovative investor to contribute to the economic growth that the new government is making an urgent priority.

Other signals to the market could follow through the new national infrastructure strategy and new industrial strategy the Labour government has promised. However, immediate intentions of the government as to its approach to data centre development emerged in a speech by new chancellor Rachel Reeves in which she confirmed the government plans to revisit decisions by local planning authorities to reject two data centre schemes near London.

The proposed development of data centres on ‘green belt’ land – broadly, land designated to prevent urban sprawl by keeping land permanently open around urban areas – can be particularly exposed to political factors. Such development is, in any event, subject to specific rules designed to protect against urban sprawl, safeguard the countryside, and prevent conurbations merging together, under planning laws in the UK. Two recent cases highlight the challenges of seeking to develop on green belt land.

In the first case, the development of a hyperscale data centre and associated facilities was proposed on land that straddled two local authority boundaries – Buckinghamshire and the London Borough of Hillingdon. After a period of non-determination elapsed, the application was considered by a planning inspector who refused planning permission because it was proposed for green belt land. A judicial review, however, was lodged against the inspector’s decision, with the High Court determining that it was unlawful. The court remitted the case back to the Planning Inspectorate for redetermination, but the delay had an impact on funding for the data centre project and the site is now earmarked for a different type of development.

Harm to the green belt was also the core consideration in an application for a separate data centre project being rejected in Buckinghamshire. In that case, Buckinghamshire Council initially refused an application for outline planning permission for redevelopment of a former landfill site to comprise a data centre. The case went to appeal, where a planning inspector recommended the appeal be dismissed but passed responsibility for determining the appeal to then secretary of state Michael Gove. Despite acknowledging the significant and substantial demand for new data centres in the area and their potential contribution to the economy, Gove determined that there was insufficient justification for the development in the green belt.

Other factors can also play into whether plans for data centre schemes obtain planning permission in the UK, regardless of whether the scheme is to be situated in green belt land or not. For example, an application for a multi-purpose project within London’s Docklands area, which included plans for a data centre, was subject to scrutiny for its potential effects on heritage assets and its compatibility with the maritime history of the site. Tower Hamlets Council initially refused planning permission for the scheme, but on appeal a planning inspector determined that planning permission should be granted subject to conditions – including aesthetic elements aimed at ensuring that the data centre façade blended in with its surroundings and respected the history of the site.

In the US, ensuring proposed data centre schemes are aesthetically pleasing has been an important component in achieving community buy-in – and authorities’ consent – for projects, for some time. In one case, Husch Blackwell supported Verizon with its application to redevelop an abandoned slaughterhouse into a data centre site. Important components of the application were plans to improve how the site looked, by undertaking landscaping and with respect to the choice of materials for the building’s exterior.

Economic factors also play heavily into whether data centres obtain consent in the US. One of the challenges to obtaining public support for hyperscale data centre development in the US has been convincing communities that they stand to benefit from job creation.

The reality is that it does not take many permanent staff to operate a data centre. The opportunities for job creation come in the form of construction jobs, especially if the data centre is part of a mixed use, multi-building project that is to be delivered in phases and where there is the prospect of tying secure construction jobs to the project over several years. That prospect has been sufficient to encourage many state authorities in the US to prepare tax incentive packages in an attempt to attract data centre developers to their area. It is a core reason why rival US politicians of different political affiliation – who might tend to disagree with one another on most issues – are often willing to come together to lend their backing to data centre projects.

Support for data centre development has also been easier for developers in the US to win where the development is earmarked for previously developed sites. We have seen several projects where developers have moved to repurpose closed manufacturing facilities or power plants into data centre sites. The redevelopment of previously developed land is often an easier ‘sell’ to consenting authorities and the public, since those sites would otherwise lie empty and not contribute to the tax base or regeneration of an area.

In the UK, planning law is also weighted in favour of development on previously developed land. The mothballing we have seen of many of the UK’s thermal power station sites, amidst decarbonisation of the UK’s energy mix, offers potential for data centre development in this respect. Not only does the ‘previously developed first’ mantra that runs through the UK planning system mean that repurposing these sites for data centre use is likely to be viewed favourably by planning authorities but, in the case of old power stations, those sites also offer the benefit of providing prospective new data centres with ready access to the electricity grid via existing connecting infrastructure as well as established water utility supply.

Real estate owners, investors, and developers thinking about taking their sites through the UK planning system for data centre use, also need to factor in the heightened focus on sustainability.

Sustainability factors such as how data centre workers travel to and from the site – for example, whether there are readily available public transport options, or whether cars need to be used – already play into planning decisions, but a major new issue that needs to be considered is requirements around ‘biodiversity net gain’ (BNG). In short, developers must deliver a minimum 10% BNG in the context of their developments, meaning that thought needs to be given to on-site flora and fauna or some form of offsetting in other locations.

The BNG requirements add to existing challenges in navigating the planning system – a system where, at an even more fundamental level, proposed data centre development can be difficult to fit within the existing ‘use’ classification system.

The need for a holistic view

Power and planning are two important factors in whether UK real estate is suitable for data centre development, but they are not the only issues that prospective operators of data centres on those sites will factor into investment decisions.

How data centres will be taxed is another important factor, for example. The community infrastructure levy or indirect taxes through the imposition of so-called ‘section 106’ obligations – conditions on planning permission being granted, which can include duties to invest in other infrastructure – are examples of planning-related taxes that could arise in England, while the rate of property-related taxes like business rates that could be levied are set by local authorities and could also be influenced by whether a data centre site sits within low- or no-tax enterprise zones.

Security is also a core consideration – not just from how physically secure a site can be made, but whether the nature of the arrangements put in place to support development, such as in relation to environmental factors and resilience, present a risk that commercially sensitive information pertaining to the project could come into the public domain.

Allied to the complexities we have highlighted in addressing challenges in accessing power or water, navigating the planning system, and winning community buy-in, these issues demand that owners, investors and developers of real estate in the UK take a holistic view of the opportunities ahead to attract data centre operators to their sites.

The scale of the opportunity

Recent evidence of the opportunities available to developers that can successfully navigate the energy, planning and regulatory framework can be found in the sale by property developer Harworth Group plc of 48 acres of redeveloped land at the site of the former Skelton Grange power station in Leeds to Microsoft, for a total consideration of £106.6 million. Facilities planned for the site, which Harworth purchased for redevelopment in December 2014 for around £3m, include a hyperscale data centre, an energy from waste (EfW) and battery storage facility, and around 250,000 sq ft of industrial and logistics space.

Harworth is anticipating a 40% internal rate of return (IRR) on its original investment once work on the site is complete, according to its press release on the Microsoft transaction.

“The rising trend in AI and the increasing demand for data centres presents an opportunity for both developers and investors, particularly developers with an extensive landbank and the skillset to unlock that land for high value uses,” Matthew Smith, senior development manager at Harworth, told us.

“Unlocking these complex pieces of land for regeneration and high value uses creates jobs in local communities, drives economic growth and inward investment, and can provide attractive returns for investors. Choosing the right partner and engaging the right stakeholders is key, and whilst the planning process is complicated, it can be done.”

Co-written by Mike Long and Rodney Carter of Husch Blackwell, with assistance from Mike Pocock, Robbie Owen, Jan Bessell and Ronan Lambe of Pinsent Masons.