The grid
Grid congestion is a structural constraint that cuts across borders: insufficient existing capacity, slow and costly infrastructure build-out and a backlog of connection requests are combining to create challenges globally for data centre development at scale. In Great Britain, Ofgem’s July 2026 consultation, which proposes a commitment fee and queue management milestones system to tackle speculative data centre projects, notes there are approximately 315 data centres in the connections queue representing around 73GW of demand. Across Europe and the US, the picture is similarly strained. While reforms in most major markets are progressing, the next cohort of data centre projects needs imminent solutions.
Great Britain’s Strategic Spatial Energy Plan (SSEP), which is expected to be published in Autumn 2027, will provide a pathway for electricity and hydrogen generation and storage types, locations, capacities and timings, taking account of cost and network needs. The plan will inform further grid build-out and increase certainty for developers and investors in the longer term. In the shorter term, however, latency-sensitive operators requiring proximity to end users have little option but to explore other solutions.
We will be publishing a separate client note looking at the potential impact of recent developments in grid reform and spatial planning more broadly.
Co-locating data centres with power generation: structures and shared risks
Co-locating data centres with power generation is one response to some of the challenges with the grid outlined above. There are broadly two ways of doing this.
(i) Co-located generation: Sometimes described as hybrid powering or behind-the-meter generation, co-located generation involves a generation asset (sometimes with an associated electricity storage asset) being built, or repowered, on or adjacent to the data centre site. This enables the data centre to draw power directly from the generation or storage assets rather than from the national distribution or transmission system.
Microsoft's 20-year agreement with Constellation Energy to restart the Three Mile Island nuclear plant and Pure Data Centre Group's activation of Europe's first islanded data centre microgrid outside Dublin in March 2026 illustrate the scale of ambition and the range of solutions now being deployed commercially. Looking further ahead, Small Modular Reactors (SMRs) represent a potentially transformative development for data centres with continuous, large-scale power demands. To this end, the hyperscalers are investing heavily in SMR development to help future-proof their power supply.
A fundamental question for any co-located generation is whether the objective for the data centre is full independence from the national distribution or transmission systems or supplementation of an existing or anticipated grid connection. It is often the case that brownfield and industrial sites are considered attractive for co-location or partnership with existing generation. Such sites frequently carry pre-existing grid connections and benefit from planning conditions already adapted to large-scale industrial power use as discussed in Part 1 of this series.
A broader and more speculative question is whether and how, as co-located generation becomes more common, regulatory treatment evolves in respect of dispatch and balancing (which together represent the optimisation processes used by system operators to manage how generation is used to meet demand) along with network charging and access rights.
Two recent examples suggest possible policy directions. In the US, the Federal Energy Regulatory Commission has looked to speed up connections for data centres while at the same time proposing a designation of co-located generation that may expose data centres to higher transmission upgrade costs than had been originally anticipated. Meanwhile in Ireland, the CRU’s December 2025 decision, as well as setting targets for sourcing power from renewable energy, will require data centres with a maximum import capacity at or above 10MVA to provide their own dispatchable generation or storage capacity and participate in the wholesale electricity market, making co-located generation not merely a commercial option but a regulatory prerequisite.
(ii) Private-wire network: An alternative to co-location generation is for data centres to establish a dedicated, direct electrical connection between an existing generation asset and the data centre. This type of connection, which is not part of the national distribution or transmission system, is known as a private-wire connection.
In Great Britain, the distribution of electricity ordinarily requires a licence under section 4 of the Electricity Act 1989. The Electricity (Class Exemptions from the Requirement for a Licence) Order 2001, however, provides exemptions for private-wire networks meeting defined criteria, principally those connecting generation to consumption across land in common ownership or occupation and those of limited geographic scope. Whether a given structure falls within an applicable exemption is often a highly fact-specific and complex question. Linklaters has plenty of experience in this exercise having analysed such structures over the past three decades.
Project-on-project risk
While it may appear simpler for both generation assets and data centre assets to share common ownership and financing, these assets generally attract different equity ownership: energy generators do not typically operate data centres and vice versa.
Where the two assets are financed independently, the fundamental challenge is the combining of a generation project and a data centre into a mutually dependent system, with each side operating in a different risk framework. This is classically referred to as "project-on-project" risk.
Project-on-project risk is at its most acute before both assets are operational. Delays in construction or commissioning of either asset will affect revenues. Consideration should be given in commercial discussions to how those risks are allocated between the parties, or otherwise mitigated through, for example, liquidated damages or insurance.
From the data centre's perspective, the power supply must deliver. On the other side of the equation, the generator needs certainty that the data centre is going to take the power it supplies. This will come into even finer focus for a captive generator which has no immediate alternative route to market. In this scenario, the generator and its lenders may require the power offtake to the data centre to be structured on a take-or-pay or take-as-produced basis.
If electricity storage is available alongside the generation project, the dispatch logic and liability for dispatch failures need to be factored in where the storage is grid-connected. A battery system serving as the data centre's resilience reserve and as a balancing services asset for the public grid has two competing sets of obligations. A dispatch decision made in favour of the balancing markets may leave insufficient reserve to cover a generation outage. The allocation of dispatch priority and the consequences of dispatch failures should, therefore, be clearly documented in the relevant project agreements.
Shared asset risk
Many co-located generation and data centre structures often involve shared infrastructure and land. Where the same physical asset serves multiple contractual purposes and multiple parties, the allocation of asset ownership, maintenance obligations, upgrade costs and liability for failure are structurally complex. It is crucial that there is clarity on precisely what is shared and on what legal basis. Shared infrastructure is often not owned jointly but rather by one party or an affiliated third party and made accessible to the other parties as required. Shared infrastructure can also create complexity for security arrangements supporting separate financing of data centre and generation assets. For lenders, it is important to understand whether they will have security over the infrastructure or contractual access rights that may or may not survive insolvency.
If shared infrastructure such as metering assets and substations is constructed to serve both the generation project and the data centre, costs will typically have been shared between the parties in proportions negotiated at the outset. Shared asset risk can also arise where the generation asset holds a grid connection and the data centre's access to both private-wire supply and grid fallback flows through that single connection point. Where a private wire forms part of the shared infrastructure, the ownership of that wire, the terms on which the data centre accesses it and the consequences of a failure of that connection must be addressed in the project documents.
Stranded asset risk
Perhaps the most structurally significant risk in co-located power arrangements is the risk of asset stranding on both sides if the commercial relationship between assets breaks down or does not materialise as expected.
As noted above, a co-located generation asset may not have an immediate alternative route to market. This vulnerability persists through the life of the arrangement and becomes critical if the offtake agreement terminates. Alternatively, the data centre may never achieve the intended level of demand, leaving the generation asset with a gap in its revenue against its debt service unless payments are made on an availability or pay-as-produced basis. Finding a replacement counterparty or establishing new grid access is neither quick nor inexpensive. Where a private wire is in place, it may have been designed and permitted for that specific purpose and may not provide a viable route to a third-party buyer.
On the other hand, a data centre designed with dedicated co-located power faces acute operational risk if the generation asset is delayed, suffers reduced availability or is acquired by a party with different commercial intentions. If back-up power is insufficient to sustain full operations, the data centre operator faces not merely an economic loss but a potential inability to honour commitments to its tenants, with reputational and potentially regulatory consequences.
Financing considerations
The risks described above bear directly on whether power and data centre assets can be financed jointly or separately, and on what terms lenders will require those financings to be structured. While joint financings are now occurring in the US, this structure is often driven by ownership, location and exit considerations. Where a single sponsor controls both assets, an integrated structure may be achievable, although separate SPVs may be required where separate lender groups are financing the respective assets or where independent exit of the two asset classes is a commercial priority or required by regulation. Where generation and data centre assets have separate ownership and/or have been financed independently, bespoke and highly structured intercreditor and security arrangements governing the priority of payments, enforcement sequencing and the treatment of shared infrastructure must be carefully negotiated.
Step-in rights require particular care in this context: a lender enforcing security over the generation asset must be able (as well as be required) to continue delivering power to the data centre without triggering a default under the data centre's tenant commitments, and vice versa. Where a private-wire structure crosses third-party land, the land rights over the network route, the regulatory treatment of the network and the additional insolvency and enforcement risks in relation to land not in the control of either party also need to be considered.
Linklaters is very experienced in creating bespoke structures to address these complex risks, by deploying our integrated energy, real estate, project finance and corporate expertise.
Exit considerations
A data centre with co-located generation or a private-wire arrangement represents an attractive prospect to various forms of capital. Infrastructure funds with specialist energy mandates may be natural acquirers of generation and network assets separately from the data centre real estate. Prudent sponsors will structure projects from the outset to facilitate this optionality, ensuring that SPV architecture and documentation support a clean separation. Change of control provisions in the documentation must be negotiated with exit strategies in mind from the outset.
Assets with verified, additional renewable supply credentials may increasingly command a premium over those reliant on fossil fuel backup or residual grid import, as investors are under the same pressure as tenants to demonstrate sustainability. Regulatory requirements may also necessitate low carbon sources, such as the expected EU data centre energy efficiency regulation. In this regard, ESG positioning is a factor in exit valuation as much as it is in initial capital raising.
Regulatory transferability adds complexity. Transferring generation or distribution licences or approvals is not automatic, and regulatory engagement may be required, which may slow down the transaction.
Securitisation is also emerging as an exit or refinancing tool. Stabilised cash flows from operating data centres with investment grade tenants can underpin an asset-backed financing structure which can achieve a lower cost of capital than conventional project finance. The interaction of co-located generation with a securitisation vehicle requires careful analysis, including clean legal separation of revenue streams, credit enhancement and rating agency analysis of the underlying contracts.
Looking ahead
Co-located generation and private-wire networks are no longer a workaround to the issue of power supply to data centres but a core development strategy. On both sides of the Atlantic, the regulatory landscape supporting this strategy is evolving rapidly. For any data centre developer considering this strategy, it is crucial to engage with the risks specific to power projects and ensure that the transaction documents adequately identify such risks and their consequences. Transactions also need to be structured in a way that works for multiple sets of investors/lenders, facilitates a robust and efficient financing process and with consideration for exit opportunities or refinancing post-construction.
Structuring commercial arrangements which are compliant with the regulatory requirements, whilst meeting the competing needs of generators and data centre developers to facilitate one or more limited recourse financings is a challenge. Linklaters is proud to have helped our clients successfully structure numerous successful co-located generation transactions over recent years and is leveraging this experience to help our existing and new clients in the data centre space. The developers and investors who build these capabilities in the data centre market now will be best placed to move decisively as the market continues to develop.
Please get in touch with your usual Linklaters contact or the authors of this article if it would be helpful to discuss any of these issues, and potential solutions, in more detail.
Written by Richard Coar, Francesca Matthews, Ross Schloeffel, Jessica Hargreaves and Ed Jackson
