Publication
Unlocking the queue? Ofgem’s proposed reforms for data centre connections
Unlocking the queue? Ofgem’s proposed reforms for data centre connections
01
Publication
01
Author: Jessica Hargreaves
Data centres now account for around 73 GW of Britain's demand connection queue; this poses a significant challenge under a first come, first served connections process. With the reformed generation connections process now subject to new readiness and strategic alignment criteria, Ofgem, NESO and the government are turning their attention to the demand side.
Ofgem’s July consultation on the “Curate" pillar of the proposed Demand Connections Reform process (more on which below) sets out two key proposals. It focuses on addressing specific problems with the composition and behaviour of the demand-side connection queue, primarily caused by the sheer volume of capacity being sought by data centres.
Ofgem’s analysis shows that applications amounting to approximately 73 GW of the total demand queue are data centres, comprising around 315 projects with total contracted capacity ranging from 1 MW to 1,500 MW. A closer look at the different types of data centre developer represented, however, unveils the complexity of the sector. Hyper-scalers are present as expected but so are co-location providers, energy and infrastructure developers, powered land developers and independent landowners. In each case, the relative costs of securing a demand connection are low in comparison to the value that developers are seeking to secure by having a grid-connected plot of land. The impact of many of these applications being non-viable (unlikely to progress to energisation) or speculative (with no credible end user or development capability) is significant; network investment signals are distorted, future network capacity is blocked, and viable and strategically important projects are delayed.
The objective of the new measures is, therefore, to ensure that viable projects can secure timely connection and strategic projects can be prioritised. There is currently no mechanism to facilitate this with respect to demand connections.
Commitment fee
Under the current proposals, data centre projects at or above a 40 MW threshold will be required to secure (by performance bond or letter of credit) a returnable commitment fee from the point they accept a connection offer until energisation. The proposed value of the fee is between 2.5% and 7.5% of average data centre capital expenditure, which would result in a fee of approximately £237,500 to £712,500 per MW of requested capacity. This means that a data centre with a requested connection of 100 MW will have to secure significant sums of £23.8 million to £71.3 million at the point of accepting a connection offer (based on an assumed capex intensity of £9.5m per MW). Ofgem’s assessment is that the proposed fee range would not materially impact viable projects and the de-risking of connection queue waiting times may even lead to an improvement in overall returns. Acknowledging that the sector is developing at pace, Ofgem is also proposing changes to NESO’s licence conditions to allow for either discretionary or periodic reviews of the amount of the fee and/or the applicability threshold. Such changes would apply to both existing and future projects, with existing projects having a period of three months to terminate a connection agreement if they did not intend to post additional security.
The scope of who is caught by the fee is not fully settled: Ofgem is proposing to define a "data centre" for these purposes by reference to "data centre service" as defined in the Cyber Security and Resilience (Network and Information Systems) Bill, while acknowledging that this definition may change before implementation. Developers and investors will want to track this closely, particularly for mixed-use and repurposed sites. Where a data centre is co-located with a generation project, the consultation does, however, clarify that the data centre component would be subject to the data centre commitment fee (provided it meets the threshold) and the generation component subject to the existing generation project commitment fee.
The fee will be returned if the project proceeds as planned but forfeited if the project terminates or fails to comply with the relevant requirements.
Queue management milestones
New milestones set out in the consultation, which would be met in addition to NESO's existing queue management milestones, require data centre developers to provide evidence of project progression at specific stages of the connection process. Ofgem's minded-to position is to apply the new milestones to data centre projects at or above 10 MW. Setting this threshold lower than the 40 MW proposed for the commitment fee is intended to strike a balance between simplicity in the framework and capturing a sufficient number of projects.
The proposed new milestones include:
The timings for each of the new milestones (denoted by “m” for milestone and “Dc” for data centre) are designed to fit with NESO’s existing queue management milestone process, with the pathway selection/compute offtake evidence required at a new earlier time (M0.5.Dc), and long-lead procurement evidence and financial/technical capability evidence required alongside existing milestones M2.Dc and M6.Dc, respectively.
Once implemented, the proposals would apply to both existing and future projects. Transitional relief is proposed, however, for existing projects already at specific points in the connections process, projects due to energise within six months of implementation and a six-month grace period extension to evidence deadlines for projects that have accepted (or received but not yet accepted) a connection offer before the new milestones take effect.
The primary challenge posed by the commitment fee in practice is likely to be that acceptance of a connection offer typically occurs before project debt is put in place. The burden of providing the required security will, therefore, principally fall on project sponsors with the potential impact being that independent or small developers find this requirement harder to meet. The proposed mechanism for the fee and/or applicability threshold to be amended over time introduces some uncertainty for developers notwithstanding that it reflects the pace of change in the sector. These are some of the points on which those involved in the sector may wish to comment in response to the consultation.
The queue management milestones will, as intended, introduce a new framework for developers to navigate. While each of the requirements has been set to reflect the nature and timing of evidence ordinarily available during project development, there will be a tension for developers and investors as they balance decisions on locking in customer, supplier and financing arrangements to meet the additional requirements while also ensuring the best available contract terms, project structure and, ultimately, IRR. In particular, the requirement for binding offtake evidence at a point when developers may not have certainty about connection creates a circularity which may be difficult to resolve in practice.
The proposals have been developed with a view to avoiding risk to viable projects where requirements are set too early or at an inappropriate level, by distinguishing between the two pathways and business models. Ofgem is seeking views as to whether they are proportionate and the required evidence available at the proposed times. Developers may identify other areas where further clarity on how the proposals operate in practice will also be needed, the interaction with staggered ramp up or modular development being one example.
Opportunity to provide feedback
The consultation closed on 16 September 2026. Many stakeholders in the data centre sector would likely have considered submitting a response to assist Ofgem in coming to decisions on fee structure, proposed evidence requirements, pathways and timing of the milestones.
Ofgem will publish a response with its decisions on next steps later in 2026. Drawing on our extensive regulatory knowledge and experience along with our deep, current knowledge of data centre development and financing, we would be delighted to assist with any questions on the consultation or the response, once published.
The bigger picture
The focus on data centres in demand-side connection reform is just the first stage in the current process. The remainder of the queue is predominantly made up of hydrogen electrolysers, industrials and transport. Ofgem will be considering strengthened readiness requirements and a progression commitment fee for other demand types in due course.
This particular consultation is also just a part of the government, Ofgem and NESO’s wider proposals on demand connection reform, set out in Ofgem's earlier Call for Input and associated response.
The broader proposed reforms will be built around three pillars:
Please do get in touch with the contacts on this publication or your usual Linklaters contact for further advice and information on demand-side connection reform, which we are following closely.
01
