UK Budget 2026: data centre covenant will inform development consent applications

Iain Gilbey, Laura Thomas, Ian McCarlie and Ronan Lambe of Pinsent Masons were commenting after UK chancellor John Healey announced the new data centre covenant in his Budget announcement on Wednesday.

“The covenant sets out the headline details of a deal the government wants to make with prospective investors in, and developers of, ‘strategic’ data centres in England, to balance the imperative of delivering the infrastructure the UK needs to take full advantage of AI with community impact concerns,” said Gilbey, a planning law expert. “The covenant is a precursor to the government publishing a new ‘national policy statement’ (NPS) for data centres, which will guide applications for development consent for such ‘nationally significant’ data centre projects in future – it opened its consultation on a draft NPS on Wednesday.”

Under the covenant, the government has pledged to support the development of “strategic” data centres through a variety of steps that broadly focus on facilitating their speedy connection to Britain’s electricity grid.

For example, it said that for sites that demonstrate sufficient strategic value, it will use powers under the Planning and Infrastructure Act “to prioritise strategically important demand projects, including data centres, by reserving future capacity and reallocating capacity released when other projects leave the connections queue”. It said it will also use powers to ensure “strategically important data centres and other strategically important projects” can access any new capacity that can be found in the system.

The government has further pledged to “accelerate connections before 2030” and enable developers behind “exceptionally strategic projects” to temporarily operate on-site generation to power their data centre operations, under a new “tightly controlled” permitting regime it plans to develop, until such time as the projects can be connected to the grid.

To access this support, the government expects data centre developers to meet a range of “tests”, including around community benefit and sustainability.

For example, developers will need to cover “any energy costs they create”, “protect nature, minimise water use and publish annual energy and water consumption reports”, and “capture the heat they produce for nearby homes, schools, hospitals or businesses wherever practical, rather than letting it go to waste”. They will also need to agree a “local benefit plan” with the local community committing the developer to make a “substantial investment”, commensurate with the size of development, that “can be spent on local priorities, like transport, parks and town centres”.

Developers will further be expected to create local jobs that last beyond construction, invest in paid apprenticeships and training, and “make a meaningful contribution to the development and deployment of British AI hardware in the UK” through their supply chain arrangements. Data centres built in England will also be expected to “provide secure and reliable access to compute” for the NHS and other “critical services and national priorities” in the UK.

The government said it plans to define what constitutes a ‘strategic’ data centre in due course and to specify “the additional criteria such projects will be expected to meet”.

Laura Thomas, who advises on data centre projects, said: “The data centre covenant can strengthen market confidence among international investors and developers looking to build and operate data centres in the UK. By setting clear expectations around environmental standards, skills development and local investment, the government is sending an important signal that the UK is committed to supporting growth in the data centre sector while ensuring communities share in its success.”

Energy project specialist Ian McCarlie of Pinsent Masons said: “The pledge within the data centre covenant to address grid connection challenges builds on the government’s announcement last month to establish Great British Grid as a new branch of Great British Energy. Those plans, however, appear more long-term in their aims, as they envisage Great British Grid serving as a competitive driver of investment in the new electricity network infrastructure desperately needed to modernise electricity transmission and distribution in Britain and permit more data centre capacity along with significant new renewable energy capacity.”

“There remains a need to improve the grid connections process in the short-term, amidst problems with the implementation of reforms overseen by the National Energy System Operator (NESO). While the government has alluded to taking a more interventionist approach to use powers under the Planning and Infrastructure Act to facilitate grid connections for strategic data centre projects, developers will want much more detail on this, to get comfortable that what it is planning will have a meaningful impact on timelines for securing grid connection offers,” he said

Ronan Lambe, who also specialises in energy projects, said: “The plans to allow data centre developers to build on-site generation appear to envisage potential relaxation of electricity licensing and/or consenting rules. While this is an interesting development, it does not appear to represent a significant new benefit to data centre developers. Current consenting and licensing rules allow data centre developers or third parties to do this – and indeed some are. What are more significant are the plans Ofgem is currently consulting on, which float giving large energy users such as data centres permission to build transmission infrastructure themselves and then transfer it to the transmission owner in due course – a bit like what happens under the regime that applies to offshore transmission owners.”