29/07/2025
Written by Rupert Lugg, Lucy Thomas and Freddie Sedgwick
Data centres are becoming an increasingly important part of UK infrastructure as, following the July 2024 consultation on the National Planning Policy Framework, the UK Government is now allowing their status to be elevated to ‘Nationally Significant Infrastructure Projects’ (NSIP) and being designated as a Critical National Infrastructure (CNI), allowing them to receive extra Government support during major incidents, along with other benefits.
Being an NSIP means that planning applications will go via a different consenting process intended and designed to result in faster decisions. This elevation in status shows that the government are taking the development of data centres seriously and sees the benefits they can bring to businesses and society.
The UK Government is accelerating its efforts to build the infrastructure needed to support AI growth, with the introduction of “AI Growth Zones”. Where local authorities and industry firms can apply to become a designated “AI Growth Zone”.
Despite the support of NSIP status, data centres remain complex pieces of infrastructure that require a number of commercial and legal issues to be considered and managed to ensure successful delivery of each project (to time and budget). From our experience of advising on recent data centre projects, there are a number of key themes and challenges that are increasingly common across the market.
1. District Heating Opportunities
The emergence of the data centre market is coinciding with the growth of the district heating market in the UK. As the UK Government seeks to expand the use of district heating through zoning programmes and new regulatory frameworks, there is a clear opportunity for waste heat from data centres to feed into district heating schemes within their locality. From a data centre perspective, this presents an opportunity for the sector to contribute to the decarbonisation of buildings by providing low-carbon heat and avoiding the need for households and workplaces to rely on energy-intensive heating solutions such as gas boilers.
Given the nascent status of this market, a market standard approach in the UK to Heat Supply Agreements between data centres and district heating companies (often referred to as ESCOs) has yet to emerge. One of the key commercial principles within these arrangements will be the extent to which data centres are willing (or able) to guarantee the availability of heat. Where data centres are not able to guarantee supply, district heat projects will need to establish additional energy sources to provide continuity of supply across the network.
2. Grid Connection
Connecting to the National Grid remains one of the key challenges in relation to the development of sites for data centres in the UK, with grid connection dates often not being available until much later than required. To address grid connection delay issues, UK Grid reform is being undertaken to accelerate connection for projects (and, in particular, renewable clean energy projects). This reform is based on revising the ‘queue management’ approach through the introduction of a ‘First Ready and Needed First Connected’ approach, effectively a move towards a ‘connect when ready’ policy.
Even with the current reforms to the Grid connection process issues, in relation to grid capacity at certain sites and for certain regions, remain a significant obstacle to the development of data centres. Increasingly therefore, developers are actively looking to develop on sites that are within close proximity to renewable energy sources or co-locating developments with renewable energy sources.
3. Planning Issues
A key aspect of any site development will be the work undertaken to seek to ensure planning consents are obtained and any planning conditions imposed are not commercially unviable. There is an opportunity for planning issues to be mitigated through the implementation of Strategic Planning Zones, where local authorities have been working in tandem with the National Infrastructure Commission on zoning policies to designate areas for infrastructure. Where utilised, this zoning approach would see a streamlined approval process and provide clarity for developers and investors.
4. Supply Chain Complications
As the demand for data centres has increased, so has the demand for the components which are needed to create them; key components like transformers, switchgears, generators, semiconductors and HVAC systems have experienced long lead times. To mitigate the risk connected to supply disruption and asset price fluctuations developers are seeking to put a range of additional contractual arrangements in place with their supply chain, including early reservation arrangements with flexibility on cancellation rights, direct arrangements with third party suppliers (including guarantees etc. where appropriate), framework arrangements with suppliers for longer term price certainty, continuity arrangements with suppliers for extended storage requirements etc.
Developers are also looking to build resilience into their procurement strategies, and there has been a revival in ‘homegrown/nearshore’ manufacturing, reducing the pressures on global supply chains. Developers and operators are seeking unique solutions to these issues, such as the use of modular and prefabricated units.
5. Data Security
For data centre operators, compliance with cybersecurity measures represents a key operational challenge. data centres must comply with multiple and evolving standards, including GDPR, NIS 2 Directive, ISO and more. This risk increases where data centres rely on several third-party suppliers for software, maintenance and security. To mitigate this risk data centre operators are increasingly using an integrated approach to physical and digital security. For example, there has been an increased use of AI to detect threats and improve response times.
6. Skill Shortage
People who are essential to the day-to-day operation of data centres are fast becoming a scarce resource as technologies powering these facilities rapidly develop. A recent study by Uptime Institute shows that 42% of data centre operators are finding it tough to retain talented staff. This has led to operators joining forces with academic institutions by developing and creating programmes to attract top talent and ensure there is a steady flow of talent coming through.
7. Cost of Electricity
UK energy prices are renowned for being comparatively higher than those of its European partners, the main reason for this is because of our reliance on gas imports. The price in the electricity market on any given day is dictated by the most expensive source of generation available, which in the UK is gas and under the marginal pricing system we currently use, the UK’s electricity market price is set by gas 98% of the time, whereas the average in Europe is 40%. This has a knock-on effect on everyone and, in particular, data centres as they are large consumers of electricity.
However, as the UK moves towards achieving its net zero target and more renewable and green energy solutions are built and developed, our reliance on gas will decrease. This is already happening in the UK; last year, over half of our electricity was generated by renewable sources. In order for this benefit to flow down to the end consumer a few aspects of the market will need to change and develop. Until we can break the link between gas and renewable pricing or until the amount of gas in the system reduces by increasing our storage capabilities, we anticipate that the electricity prices will remain comparatively high.
