U.K. Plans to Charge Data Center Developers Up Front

Written by Martin Lynch, European News Editor for IIR News Intelligence (Sugar Land, Texas)

Summary

The U.K. energy regulator Ofgem is proposing to make developers of data center projects pay a percentage of the overall project costs up front in order to ward off speculative projects and free up space on the grid.

New Proposals

Developers of data centers projects in the U.K. could face paying millions of pounds in advance as the country's energy regulator, Ofgem, seeks to free up tightening electricity network capacity. Ofgem has set a series of proposals to tackle "speculative data centre projects in Britain's electricity connections queue," as part of a wider programme of reforms to ensure network capacity is used for projects that are ready and able to connect. It said that demand connection applications have surged from 41 gigawatts (GW) to 125 GW in under a year, driven largely by data center projects, which account for at least 80 GW. According to Industrial Info Resources data, there are 224 U.K. data center projects worth US$112 billion in investment. 

Pay Up Front

The proposals will see developers having to pay a "data center commitment fee" up front, set within a range of £237,500 (US$320,000) to £712,500 (US$960,000) per megawatt (MW). This is roughly 2.5% to 7.5% of average project costs. The fee would be refunded when the project reaches energisation but be forfeited if the project exits the queue early. Ofgem said it was concerned that "a significant number of projects in the queue may not ultimately proceed," potentially delaying viable developments and creating misleading signals about future network investment needs.  It wants the new measures to boost other reforms to the system that have seen around 7.8 GW of projects "accelerated by an average of six years." 

Introducing Project Milestones

Alongside the proposed fee, Ofgem is consulting on new data center-specific queue management milestones that would require developers to demonstrate tangible progress through evidence such as financial capability, commercial maturity and procurement activity if they wish to retain their place in the queue. "Britain's electricity demand connections queue has more than tripled in size in less than a year, and consumers should not bear the risks created by speculative projects taking up space in the system," said Ofgem's Director for Energy System Design and Development Eleanor Warburton. "The connections system must work for consumers and for the projects that are ready to invest, build and connect. Where speculative projects take up space in the queue, they can delay other schemes and create uncertainty about future network needs."

U.K. AI Strategy Growing Slower Than Planned

The U.K.'s government has high hopes for the rollout of more AI data centers. In January it unveiled five AI Growth Zones (AIGZs), designed to speed up data center development to capitalize on the AI hyperscale boom. These zones would build massive AI data center complexes, of 500 MW or greater - bigger than any now operating in the U.K.. According to Property Week, these AIGZs are in Oxfordshire, at Culham Campus; in the Northeast, at the Cambois Data Centre Campus in Blyth and Cobalt Park in North Tyneside; in North Wales, at Prosperity Parc in Anglesey and the former nuclear power station site at Trawsfynydd; in South Wales, where the former Ford Bridgend Engine Plant is the flagship site; and Lanarkshire in Scotland, where a new data centre campus is planned around DataVita's existing centre in Airdrie. They were selected for their availability of suitable sites and access to large energy sources and would benefit greatly from easier planning, discounted electricity, government support and faster grid connections. However, data from property-tech firm Search Acumen shows that only one such project in Wales has applied for planning permission. 

Cautious Reaction

There has been a cautious welcome from the industry and industry watchers. Most support the desire to get so-called "zombie" projects out of the grid connection queue but warn that high up front charges could discourage investment in the sector. Matt Evans, chief operating officer of trade association techUK, told fDI Intelligence that the move was positive but that "there is a fine balance between discouraging speculation and keeping Britain an attractive place to invest. The cancellation fee levels on the table risk adding another cost to a market that already faces some of the highest electricity prices and slowest planning timelines in the developed world." 

Key Takeaways

• U.K. energy regulator Ofgem plans to make developers of data center projects pay a percentage of the overall project costs up front in order to free up space on the grid. 
• The fees will be set at  roughly 2.5% to 7.5% of average project costs which will  be refunded when the project reaches energisation but be forfeited if the project exits the queue early.
• Industrial Info Resources is tracking 224 U.K. data center projects worth US$112 billion in investment. 

About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 Trillion (USD).