Power for a promise: the UK's bargain with AI data centre investors

The UK has the AI market and the AI start-ups. What it does not yet have is the infrastructure to scale them.

By the government’s own account, the UK is the third largest AI market in the world after the US and China, and home to more AI start-ups than any other country in Europe.¹ It is also betting on a more diverse AI tech stack through the UK Sovereign AI Fund.² But the government has concluded that this is not enough. With secure and reliable access to AI and data becoming vital to defence, the NHS and other critical services, the UK cannot continue to rely almost entirely on data centre infrastructure located overseas.³ The government estimates that the UK will need 6GW of AI data centre capacity by 2030, around three times the UK’s total data centre estate today, most of which was not built for AI compute.

The UK’s binding constraint is power. Grid connection queues are long and local community opposition is growing. As a case in point, last month Microsoft pulled out of a deal over a planned £2 billion AI data centre at Loughton in Essex (East of England), reportedly after the local network operator warned the developer that adequate power might not arrive until the early to mid-2030s.⁴

On 28 October, alongside its inaugural Budget, the Burnham government published its policy response, the centrepiece of which was the Data Centre Covenant (the Covenant).⁵ At its heart, the Covenant is a bargain: meet five tests – on energy costs, local communities, the environment, jobs and UK supply chains, and security – and a data centre judged “strategic” may qualify for additional government support, subject to further designation criteria. A new Ministerial Control Centre, to be chaired by the Minister for AI and supported by Treasury and energy ministers, will use government powers to help these strategic data centres to the front of the queue for grid power and, in exceptional cases, to bridge the gap with temporary on-site generation.

The government describes the Covenant as “a clear offer”. It promises greater speed and certainty “in return for responsible development that delivers lasting benefits for communities”.⁶ This signals a significant opportunity for data centre and energy infrastructure investors in the UK, as strategic eligibility could materially change relative asset values. Key details remain unsettled, including the definition of “strategic”.

This alert takes an initial look at what the Covenant offers and the implications for investors in UK compute and power, including how UK policy choices could alter the value of grid-secured assets and the capital required to develop them.

The bargain

The Covenant sets out the following five tests that all data centres are encouraged to meet and which “strategic” data centres must meet to qualify for additional government support:

• pay their fair share of energy costs and make credible commitments for the grid capacity they request;
• invest in their local communities;
• meet high environmental standards (including energy and water efficiency);
• create jobs and prioritise UK suppliers and technology; and
• strengthen Britain’s security, including secure compute for the NHS and other public services, information-sharing with government and the National Cyber Security Centre, and above-baseline cyber standards.

The Covenant recognises that public support is a precondition for delivery: the UK will only build the compute it needs if communities see the benefits, and the barriers to delivery are addressed. For investors, local opposition and community-benefit commitments can affect development schedules, operating costs, refinancing and exit. Strategic data centres are expected to agree a Local Benefit Plan, with substantial investment developed with the host community and linked to the size of the development, and to report on their energy and water use every year. The Covenant also asks that new facilities be designed to achieve a Power Usage Effectiveness (PUE) of 1.3 or better and to minimise their draw on public water supplies (for example through closed-loop cooling) and that waste heat be reused where there is a viable local user.

In return, the UK says it will provide additional support, coordinated through the new Ministerial Control Centre, for “the most strategic” data centres. For instance, the Covenant states the government will use new Planning and Infrastructure Act powers to reserve future grid capacity and to reallocate capacity that is released when other projects leave the connections queue. Where government thinks it needs to go further, it can facilitate the transfer of pre-2030 data centre connection contracts to strategic projects.⁷ Projects judged “exceptionally strategic” may, under a framework still to be developed, obtain approval for temporary on-site power to bridge the gap to grid connections.⁸

On paper the Covenant’s tests are policy, not law, and will be kept under review. However, the line for investors and developers between “encouraged” and “expected” may evolve. The UK’s draft National Policy Statement for Data Centres (the NPS) published the same day as the Covenant would, if adopted, turn several of the Covenant’s tests, including credible grid commitments, electricity-price impacts and a PUE of 1.3 or better, into assessment criteria for larger projects in England, and may also be a material consideration in ordinary local planning decisions.⁹

Why power is the prize

The normal rule for real estate may be “location, location, location” but for UK data centres, it is “connection, connection, connection”. In other words, power and grid connectivity are the key assets that drive project valuation, bankability and exit. A site with a deliverable grid connection may command a materially different valuation from one holding only a speculative queue position.

There is no shortage of plans to build data centres in the UK. Great Britain’s energy regulator (Ofgem) estimates that data centres account for around 73GW of the demand connections queue (all types of data centre, not just AI), across roughly 315 schemes. To put this in context, Great Britain’s peak electricity demand in 2025 was about 45GW, while the UK’s existing data centres have around 2GW of capacity (the draft NPS estimate, which excludes enterprise sites). As noted above, the government estimates that the UK will need 6GW of AI data centre capacity by 2030.¹⁰

Plenty of the data centre projects in the queue will never be built (Ofgem itself considers a material share to be speculative or non-viable). But the mismatch between plans and what the grid can serve explains why the government has decided that, for the strategic data centres it wants most, it will stop waiting for the queue to clear itself and intends to allocate capacity as it becomes available.

Pre-2030 connection contracts: from bankable asset to transfer risk

One of the most significant aspects of the Covenant is the position taken on the transfer of pre-2030 connection contracts. These are negotiated, paid for and, in financed deals, relied on by lenders. The Covenant states that, where there is a need to go further, government will use Planning and Infrastructure Act powers to facilitate the transfer of pre-2030 connection contracts. The government’s response to its consultation on connecting strategic demand, published the same day, is more cautious: it says only that the government is considering using those powers to enable transfers to “strategic AI developments, where needed to provide power before 2030, without affecting network design or other demand customers”.¹¹ Neither document explains how a transfer would work, whether consent is needed or whether anyone is compensated. Details are therefore expected to follow.

These connection and transferability aspects of the Covenant will likely become a key issue in deal diligence on sites with a pre-2030 connection. Buyers and lenders should test transferability, lender consent, the basis of any connection-related price premium and contractual remedies if project priority changes. Practical questions include whether any transfer would be voluntary or compelled, how a displaced holder would be compensated, whether a transfer would trigger default, prepayment or termination rights under financing and customer documents, and whether distribution-connected sites are caught.

Holding a place in the queue will cost more

To deter speculative demand, the Covenant says the government will support implementation of Ofgem’s proposed queue management measures and Data Centre Commitment Fee.¹² The fee would require projects above 40MW connecting to, or affecting, the transmission system to provide refundable financial security of between £237,500 and £712,500 per MW (2.5 to 7.5 per cent of Ofgem’s assumed capital cost of £9.5m per MW) from offer acceptance until energisation, forfeited if the project terminates or breaks the rules. A 100MW project would therefore need to secure £23.8m to £71.3m, with potential funding and return implications for investors.

Ofgem has also proposed new milestones for data centres of 10MW or more of rated IT load (Ofgem’s preferred threshold) which would apply to projects already in the queue, subject to grace periods. These milestones would include pathway-specific evidence of a credible end user or intended self-operation, procurement of long-lead electrical equipment, and financial and technical capability. For sites intended for sale or lease, Ofgem proposes non-binding customer evidence within six months of accepting a connection offer and, at a later milestone, binding offtake covering at least 20% of compute capacity for at least a year (its preferred option). Projects that miss these milestones could lose their place. Ofgem consulted on the proposals over the summer and the government has said that a decision is expected in the first quarter of 2027.

Poland offers a recent comparison. Its reform, in force since the end of April 2026, doubled connection advance payments and added a non-refundable application fee to deter speculative applications, at levels far below Ofgem’s proposals. It is too early to conclusively judge the effect. ¹³

On-site power as a bridge, and connections with conditions attached

The Covenant envisages a “tightly controlled framework” governing the use of on-site generation as temporary power to bridge the gap to grid connections, but only for “exceptionally strategic projects”. The draft National Policy Statement further states that the proposed expedited temporary behind-the-meter route would be available only to exceptionally strategic projects where no reasonable alternative exists and other routes to faster grid access have been exhausted.¹⁴ Moreover, it must be temporary, mitigate carbon and energy-security impacts, and deliver wider benefits to the energy system.

Faster access may also mean different access. The government’s response describes a spectrum of flexibility measures: connection agreements on non-firm or lower-resilience terms, phased or ramped capacity, hybrid firm and interruptible arrangements, voluntary flexibility services and, as a last-resort tool the government is exploring, a power for the system operator to direct large users such as data centres to curtail demand temporarily. ¹⁵ Government calls flexible connections a “proportionate and necessary intervention”. The design is still being worked out.

There is a longer-term sting in the tail as well. For data centre connections after 2030, the UK government intends to align connections to regional infrastructure targets.¹⁶ If implemented, these targets would limit the volumes that can connect in each region, with grid capacity, water, land and other demand all in the mix. Government says it will consider how to avoid disrupting strategically important and advanced-stage projects, but it has provided no detail yet.

The wider UK energy policy context

The Covenant’s emphasis on energy costs reflects a broader theme in the Budget. The government has said that, until a new Cost Control Framework is introduced at the 2027 Spending Review, no further policy costs will be added to household and business energy bills unless they reduce bills overall or are essential for security of supply.¹⁷ The Covenant’s requirement that data centres pay a “fair share” of energy-system costs applies the same principle: the government does not want data centre growth to be seen as raising consumers’ bills.

A second Budget measure could affect how data centres source power. The government is consulting, until 9 December, on a voluntary “wholesale contract for difference” (CfD) for existing low-carbon generators.¹⁸ Generators that opt in would exchange their exposure to wholesale market prices for a fixed price over five or ten years. The Electricity Generator Levy, the windfall tax on low-carbon generators’ revenues, will be extended to run for as long as the longest wholesale CfD, but generators that sign a wholesale CfD will be exempt from it.

The consultation acknowledges that wholesale CfDs may make long-term power purchase agreements (PPAs) less attractive to generators. Data centre developers whose plans rely on a long-term PPA with an existing renewable generator should therefore consider whether that generator may prefer a government-backed fixed price instead, and whether the PPA terms or timing need to change. For investors holding both generation and digital-infrastructure assets, the proposal could also affect PPA strategy and returns across the wider portfolio.

Strategic alignment and regulatory risk

The Covenant indicates the type of data centre investment the UK government intends to support. Although it imposes no domestic ownership requirement, the government’s accompanying draft National Policy Statement calls for data centres to be “built for Britain”, reflecting its wider ambition to strengthen domestic AI capabilities and reduce dependence on overseas infrastructure.¹⁹ In practice, the Covenant encourages investment in UK suppliers and technology, support for critical public services and stronger national security. Investors should also consider applicable investment screening under the National Security and Investment Act 2021,²⁰ security requirements for government contracts and proposed new cybersecurity obligations under the Cyber Security and Resilience Bill.²¹ The government has also confirmed plans to bring all third-party data centres within the mandatory notification regime through amending regulations.²² These considerations may affect project eligibility for government support, investment structures and contractual arrangements. None of this closes the door to US and other overseas capital: there is no ownership test, the draft NPS describes the sector as market-led, and the government says its measures have contributed to £19.4 billion of foreign direct investment capital expenditure in the UK since July 2024.²³ Recent commitments suggest international investors will remain active in UK data centre and power markets, with projects seeking strategic government support expected to meet the Covenant’s tests. ²⁴

Government support, however, will not eliminate grid constraints or regulatory uncertainty. Proposed reforms could change the value of existing grid-connection rights, ²⁵ while commitments relating to energy costs, environmental performance and local communities may affect project economics throughout the investment lifecycle. Investors should therefore assess grid deliverability and eligibility for strategic support, allocate connection delays, permitting and policy-change risks among project participants, and document government engagement and compliance. With key details still unsettled, early engagement is important. Investors should monitor the forthcoming strategic project criteria, Ofgem’s proposed Data Centre Commitment Fee and the Cyber Security and Resilience Bill, as well as consultations on wholesale CfDs (closing 9 December 2026) ²⁶ and the draft NPS (closing 8 January 2027). ²⁷

Implications for investors

The Covenant’s implications will mainly be felt by new developments but are also relevant to acquisitions of existing data centre sites, associated power assets and contracted compute infrastructure. For projects seeking government support, commitments relating to community benefits, environmental performance and operational resilience may extend throughout the investment lifecycle.

Private fund sponsors and other investors should continue to monitor the implementation of UK government data centre policy and regulation, engage as appropriate (including with the draft NPS consultation closing on 8 January), and consider the implications for their strategies and portfolios. As discussed above, such issues may include:

• Grid allocation and asset valuations: Government prioritisation of strategic projects and potential transfers of existing connection rights could redistribute scarce grid capacity, changing the relative value of development sites and investment pipelines.
• Financing and development risk: Ofgem’s proposed commitment fee and stricter progression milestones could require investors to commit financial resources and secure customers and procurement arrangements earlier in development, potentially affecting financing structures and project viability.
• Social licence to operate: Growing community and political opposition can delay or derail data centre investments. By making community benefits and environmental performance explicit criteria for strategic government support, the Covenant reinforces social licence to operate as a potentially deal-critical investment risk.
• Energy infrastructure opportunities: Proposed temporary on-site generation and flexible grid connections could facilitate earlier development and new energy partnerships, although temporary power would be restricted to exceptionally strategic projects.
• Strategic alignment and location: Proposed regional grid capacity limits and UK government priorities concerning domestic AI capabilities, supply chains and national security could influence project location, structure and eligibility for government support.

Britain has the AI market and the start-ups. The Covenant is the government’s offer to find the power to match them. In a market where connection is everything, the investors who heed this offer may be the first to plug in.

¹ UK Government, Policy Paper: The Data Centre Covenant (28 Oct. 2026), https://www.gov.uk/government/publications/data-centre-covenant/the-data-centre-covenant

² Department for Science, Innovation and Technology, “AI firms pioneering drug discovery, cheaper supercomputing and more get first backing through UK’s Sovereign AI” (16 Apr. 2026), https://www.gov.uk/government/news/ai-firms-pioneering-drug-discovery-cheaper-supercomputing-and-more-get-first-backing-through-uks-sovereign-ai; HM Treasury, Budget 2026 (28 Oct. 2026), https://www.gov.uk/government/publications/budget-2026-document/budget-2026-html.

³ Council for Science and Technology, AI sovereignty: preserving UK agency in an AI-enabled world (published 19 Oct. 2026), https://www.gov.uk/government/publications/ai-sovereignty-preserving-uk-agency-in-an-ai-enabled-world/ai-sovereignty-preserving-uk-agency-in-an-ai-enabled-world-web-version.

⁴ Reuters, “Microsoft pulls out of UK Nscale data centre deal over power delay” (19 Oct. 2026), https://www.investing.com/news/stock-market-news/microsoft-pulls-out-of-uk-nscale-data-centre-deal-over-power-delay-4960690 (syndicated).

⁵ UK Government, Policy Paper: The Data Centre Covenant (28 Oct. 2026), https://www.gov.uk/government/publications/data-centre-covenant/the-data-centre-covenant.

⁶ UK Government, Policy Paper: The Data Centre Covenant (28 Oct. 2026), https://www.gov.uk/government/publications/data-centre-covenant/the-data-centre-covenant.

⁷ Department for Energy Security and Net Zero, Accelerating electricity network connections for strategic demand: government response (28 Oct. 2026), https://www.gov.uk/government/consultations/accelerating-electricity-network-connections-for-strategic-demand/outcome/accelerating-electricity-network-connections-for-strategic-demand-government-response-accessible-webpage.

⁸ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres (28 Oct. 2026), paras. 157–162, https://www.gov.uk/government/publications/draft-national-policy-statement-for-data-centres.

⁹ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres (28 Oct. 2026), https://www.gov.uk/government/publications/draft-national-policy-statement-for-data-centres.

¹⁰ Authors’ note: apologies for the confusion caused by oscillating between “Britain” and “the UK” but we have a UK data centre policy (ie, Great Britain and Northern Ireland) running alongside an electricity grid split between Great Britain on the one hand and Ireland (both Northern Ireland and Ireland) on the other. The fact that the size of the data centre market is expressed in GW (typically, a power-market concept) just adds to the confusion.

¹¹ Department for Energy Security and Net Zero, Accelerating electricity network connections for strategic demand: government response (28 Oct. 2026), https://www.gov.uk/government/consultations/accelerating-electricity-network-connections-for-strategic-demand/outcome/accelerating-electricity-network-connections-for-strategic-demand-government-response-accessible-webpage.

¹² Ofgem, Proposed data centre connection reforms (29 July 2026), https://www.ofgem.gov.uk/consultation/proposed-data-centre-connection-reforms.

¹³ Schönherr, “Poland’s grid connection reform: a necessary reset for the energy transition” (Apr. 2026), https://www.schoenherr.eu/content/poland-s-grid-connection-reform-a-necessary-reset-for-the-energy-transition.

¹⁴ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres (28 Oct. 2026), paras. 157–162, https://www.gov.uk/government/publications/draft-national-policy-statement-for-data-centres.

¹⁵ Department for Energy Security and Net Zero, Accelerating electricity network connections for strategic demand: government response (28 Oct. 2026), §1b (demand flexibility and operational control), https://www.gov.uk/government/consultations/accelerating-electricity-network-connections-for-strategic-demand/outcome/accelerating-electricity-network-connections-for-strategic-demand-government-response-accessible-webpage.

¹⁶ Department for Energy Security and Net Zero, Accelerating electricity network connections for strategic demand: government response (28 Oct. 2026), §1a (regional infrastructure targets), https://www.gov.uk/government/consultations/accelerating-electricity-network-connections-for-strategic-demand/outcome/accelerating-electricity-network-connections-for-strategic-demand-government-response-accessible-webpage.

¹⁷ HM Treasury, Budget 2026 (28 Oct. 2026), https://www.gov.uk/government/publications/budget-2026-document/budget-2026-html; HM Treasury, “Budget 2026: Breathing space for today, hope for the future” (28 Oct. 2026), https://www.gov.uk/government/news/budget-2026-breathing-space-for-today-hope-for-the-future.

¹⁸ Department for Energy Security and Net Zero, Wholesale Contracts for Difference: consultation (28 Oct. 2026), https://www.gov.uk/government/consultations/wholesale-contracts-for-difference.

¹⁹ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres (28 Oct. 2026), https://www.gov.uk/government/publications/draft-national-policy-statement-for-data-centres.

²⁰ UK Parliament, National Security and Investment Act 2021 (29 Apr. 2021), https://www.legislation.gov.uk/ukpga/2021/25/contents; Cabinet Office, National Security and Investment Act: details of the 17 types of notifiable acquisitions (updated 6 Feb. 2024), https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions.

²¹ UK Parliament, Cyber Security and Resilience (Network and Information Systems) Bill (introduced 12 Nov. 2025), https://bills.parliament.uk/bills/4035; Department for Science, Innovation and Technology, Data centres (Cyber Security and Resilience Bill factsheet, updated 3 Nov. 2026), https://www.gov.uk/government/publications/cyber-security-and-resilience-network-and-information-systems-bill-factsheets/data-centres.

²² Cabinet Office, Government response to the consultation on the Notifiable Acquisition Regulations (12 Mar. 2026), https://assets.publishing.service.gov.uk/media/69b1861a58d4ef5adaf0e4a7/2026-03-12_Government_Response_to_the_Consultation_on_the_Notifiable_Acquisition_Regulations__NARs_.pdf.

²³ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres (28 Oct. 2026), https://www.gov.uk/government/publications/draft-national-policy-statement-for-data-centres.

²⁴ See, e.g., Drax, “Drax, Brookfield and Radiant announce £20bn partnership to deliver GW-scale data centre capacity at Drax Power Station” (3 Nov. 2026), https://www.drax.com/news/drax-brookfield-and-radiant-announce-20bn-partnership-to-deliver-gw-scale-data-centre-capacity-at-drax-power-station/.

²⁵ Department for Energy Security and Net Zero, Accelerating electricity network connections for strategic demand: government response (28 Oct. 2026), https://www.gov.uk/government/consultations/accelerating-electricity-network-connections-for-strategic-demand/outcome/accelerating-electricity-network-connections-for-strategic-demand-government-response-accessible-webpage.

²⁶ Department for Energy Security and Net Zero, Wholesale Contracts for Difference: consultation (28 Oct. 2026), https://www.gov.uk/government/consultations/wholesale-contracts-for-difference.

²⁷ Department for Business, Innovation, Science and Trade, Draft National Policy Statement for Data Centres: consultation (28 Oct. 2026), https://www.gov.uk/government/consultations/draft-national-policy-statement-for-data-centres.