Powering the Cloud: How data centres can deliver sustainable growth

Contents

• Foreword
• Executive summary
• Recommendations
• The UK context for data centres
• Case study one: New standards for data centres in Ireland
• The challenges facing the sector
• Wider non-energy challenges
• Case study two: Siemens Energy closed-loop cooling system for data centres
• Solutions to power the Cloud
• Case study three: Data centre load management in the US
• Conclusions

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Foreword

The energy system is decarbonising at a rapid pace, attracting significant investment to the UK economy and ensuring that an increasing amount of the energy supplied is low carbon. As we continue the wider decarbonisation of the British economy, the alignment of supply and demand, and ensuring this is cost effective, will be critical. Artificial Intelligence (AI) has the potential to improve productivity, performance and efficiency in all sectors of the economy – including businesses operating across the energy system. The UK is in a unique position to leverage its expertise in technology and energy to deliver innovation in both the application of AI and the rapid uptake of data centre infrastructure.

The UK currently hosts 523 existing data centres, the third highest of any nation globally,^[1] with at least nine more being developed across Great Britain. These nine are in the thick of the development process – directly experiencing the challenges set out in this report, whether it be navigating planning regulations or waiting for a connection to the energy system.

Having led the way on power sector decarbonisation, the UK now faces the challenge of effectively decarbonising transport, heating, commercial and industrial use of energy, to meet its legally binding carbon targets. Data centres require significant resources – namely land, water and energy. With wider increases in demand for these resources, this highlights the need to think more strategically about how infrastructure investment is coordinated, planned and delivered. Ensuring there is adequate investment in the new low-carbon power sources required to meet this new demand will also be key. The Spending Review provides some useful funding, but more can be done to crowd-in investment into all forms of low-carbon power and flexibility.

In ‘Powering the Cloud’, we explore some of the challenges and opportunities and set out clear recommendations with a focus on how the UK could streamline processes to deliver the potential for investment and growth across the country. This will ensure that the UK can continue to be a global leader when it comes to both low-carbon technologies, data and AI.

The energy and technology sectors are ready to work with the Government to deliver an effective approach to the delivery of innovative AI applications for energy, with a focus on cost-effective delivery for consumers, taxpayers and billpayers.

Executive summary

As the economy increasingly digitalises, and as Artificial Intelligence (AI) applications grow, there is a need to rapidly scale up the number of data centres required to power our lives. Access to affordable, reliable, low-carbon power is a key enabler for investment in new data centres, and the Government’s Clean Power Mission could present the UK as one of the best places to invest in tech infrastructure, supporting a modern, digital economy. Through AI Growth Zones and wider investment, the UK’s world-leading service sector can enable the expansion of existing locations and crowd in investment in new sites.

The UK Government was right to develop a focused workstream looking at AI as a sector with high potential for growth, while also examining the barriers to connecting new data centres across GB. Not only will this support the AI sector, but it will also enable a more strategic consideration of how energy system planning and system price signals can be aligned to enable connection of strategically important industries matched by low-carbon generation.

Attracting this investment should be done in a way that avoids unintended consequences for energy infrastructure, energy system costs and the projected delivery of significant investment and growth linked to a Net Zero economy. A coordinated, strategic, and spatial approach is critical to delivering a smarter energy system fit for changing demand. This report explores the challenges and potential solutions for an effective strategy for data centres in the UK, setting out the energy considerations when looking to draw international investment toward establishing UK data centres.

Recommendations

Provide additional low-carbon power

• The Government should engage closely with the technology and energy sectors to develop long-term clarity across policy areas and market signals, aligned with the strategic intention for data centres and the need for a wide range of low-carbon generation and flexibility technologies.

Manage energy system and emissions impacts

• The Government should work with other institutions to introduce guidance, advice and requirements for all new data centres across planning and connections processes.
• The Government should consider the application of mandatory carbon reporting and reductions for data centres.
• The Government and Ofgem should review existing licence conditions, codes and guidance regarding private wire network solutions to assess if these remain appropriate.

Building necessary network capacity and reinforcement ahead of need

• The Government and NESO, working alongside industry via the AI Energy Council and wider engagement, should quickly establish clarity over the optimal locations and likely energy impacts of additional data centre investment in the UK.
• The Government and NESO should ensure that Spatial Strategic Energy Planning arrangements at all levels consider demand implications for the system.
• Ofgem, energy networks, and NESO should consider the potential for changes to existing frameworks to enable faster connections for data centres.

Accessing a timely electricity network connection and minimising network demands

• The Government, Ofgem, NESO and network operators should work collaboratively with the sector to establish an effective and strategic approach to connecting new demand and aligning this with local low-carbon generation capacity.
• The Energy Networks Association (ENA) should develop further guidance for data centres looking to connect.

Reducing electricity prices

• The Government should urgently review the cost of energy for non-domestic users and consider removing some legacy policy costs from non-domestic electricity bills and review network charges. Energy UK has previously set out analysis and recommendations on this.

Using energy policy signals to encourage location in mutually beneficial areas

• As part of the anticipated review of network charges, Ofgem should consider how specific sectors could be treated to align with the Government’s desired outcomes.
• The Government should look to clarify long-term direction for market frameworks where possible, engaging fully with the energy sector.

Consider the impact on wider sectors

• The Government should assign the National Infrastructure and Service Transformation Authority (NISTA) to review strategic coordination of land, water, energy and wider sectors in planning and investment frameworks.

Minimum standards and improving opportunities for Demand-Side Response (DSR)

• The Government and NESO should explore options for minimum standards for data centres, and measures to better incentivise and enable flexibility.

The UK context for data centres

In its AI Opportunities Action Plan, the UK Government recently set out ambitions to develop the UK’s AI capabilities and prioritise the delivery of data centres across the UK, to unleash the clear growth potential and enable the continued application of AI and wider data processing capabilities. Given the energy implications for a rapid increase in data centres in the UK, it is critical to assess the approach to connecting and powering these strategic assets.

Data and AI offer huge potential for the UK economy and for consumers. In the energy sector, for example, it is already used to forecast weather patterns and renewable output, improve customer service, and optimise electricity network management and the energy usage of homes and businesses. AI-based network fault detection can rapidly identify network outages, reducing outage durations by 30-50%.^[2]

Data centres already contribute £4.7 billion annually in Gross Value Added (GVA) to the UK economy, with a potential additional £44 billion in GVA, between 2025-35, if data centre capacity is increased above recent annual trends.^[3]

Data centres currently use 1-2% of electricity in GB but significantly more in Ireland (see Case Study One below). The rapid adoption of AI, machine learning, and the Internet of Things means data centres are forecast to account for 10% of GB electricity demand by 2050, the equivalent of more than 11 million homes.^[4],[5] However, forecasts vary significantly depending on the level of uptake of AI, and the future of electricity demand for data centres is highly uncertain.

Data Centres were designated Critical Infrastructure in September 2024, and in developing the approach to strategic planning of the energy system, the NESO and the Government will need to consider both the scale and location of new electricity demand to deliver cost-efficient investment in network and generation assets across the UK, to minimise costs for all consumers.

Many data centres need to be located near areas of high economic activity, and new sites need careful planning. For most data centres, location is driven by network access, adjacency to fibre networks, and customer demand. In many cases, the type of data centre defines where it will be located, as it may need to be close to customers or near to other data centres. Co-located sites and those using AI models, not training them (inference), will stay in areas close to customers both due to need to avoid time delays for users. Data centres using the Cloud may also need to be near other data centres to create resilience, but in the US some cloud computing is done several hundred kilometres away from customers. Therefore, data centres delivering specific activities such as AI training and potentially some cloud data processes can be based in areas away from customers.

Energy UK has worked with its members and wider stakeholders to explore the challenges and opportunities facing AI and data centres in the delivery of a strategic energy system, setting out the core areas where more focus is needed, and to enable collaborative efforts across sectors to deliver on the potential presented by this emerging sector.

Case study one: New standards for data centres in Ireland

Data centres that service the data and digital sector are a core component of the Irish economy but represent a major and growing source of electricity demand. However, the energy system on the island of Ireland is struggling to integrate them; electricity demand for data centres is currently at 21% of total demand and projected to rise to 30% within 10 years based on currently planned data centres alone. Ireland previously encouraged the co-location of renewable power generation with data centres, but this was technically challenging for many sites. A de facto moratorium was put in place on new data centre connections to the transmission system from 2022.

The latest proposals for connections from the energy regulator require new data centres to have dispatchable, grid-connected generation located nearby or within an unconstrained zone.[1] The guidance comes ahead of more strategic planning of the networks and requires System Operators to take into account the location of any data centre considering both its demand, associated generation capacity and whether it is in a constrained or unconstrained region of the electricity network, but it does not mandate operators to shift their electricity demand. System Operators will be required to publish regular information on existing and future grid network capacity and data centre operators will be required to self-report annually on their use of renewable energy and their sites’ emissions but will not be mandated to meet any defined targets.

These requirements for data centres could provide valuable investment in new gas and energy storage, given the need for new capacity, reserves and stability, but there are questions over the interaction of the new generation assets associated with data centres with wider system operation and how they will participate in the Capacity Market. There are also questions about how constraints will be defined and how the new network connection requirements will interact with planning regulations. Whilst there are lessons learned from Ireland in encouraging investment ahead of wider energy system infrastructure being in place, the UK’s clean power ambitions and the development of AI Growth Zones present an opportunity to get ahead of this and attract investment in a way that helps manage energy system impacts.

The challenges facing the sector

New electricity demand from data centres can help accelerate investment in the low-carbon electricity generation and network capacity required for the wider economy. If data centres are located in the right areas and invest in energy storage, they could increase the efficiency of the electricity system, reducing costs. The National Infrastructure Commission estimates that investment in distribution networks alone needs to double in the period to 2050, but that maximising flexibility in the system could reduce costs by 15%.^[6] However, a range of challenges are apparent when looking at the potential for data centres locating in the UK, ranging from policy clarity to timelines for planning and connection processes. These challenges are not insurmountable but do require further action from both the Government and the industry.

Policy clarity over low-carbon power investment

A typical data centre consumes as much electricity as 100,000 households, but the largest under construction today could consume 20 times as much.^[7] New power capacity is needed to meet this electricity demand increase, driving additional investment in low-carbon power and flexibility sectors. Policy clarity is needed across the sector to deliver the right mix of technologies across the right areas of the UK, with renewables, low-carbon dispatchable technologies, nuclear, including Small Modular Reactors (SMR), and wider flexible technologies from large-scale energy storage to distributed technologies.^[8],[9]

High and uncertain future electricity prices

The UK has some of the highest industrial electricity prices in Europe, 46% above the International Energy Agency member countries’ median.^[10] Some data centre operators enter into long-term Power Purchase Agreements (PPAs), contracts which directly purchase power from developers, agreeing a long-term price, to reduce price volatility for some of their electricity demand. However, even data centres that do enter into PPAs do not secure 100% of their requirements from them and remain partly exposed to increasingly volatile electricity wholesale prices. The wholesale price is only one component of the final electricity bill, with network, system, and policy costs added to the final bill. Network charges for most large consumers like data centres rose steeply since 2022, following reforms under the Targeted Charging Review (TCR), and only a small number of energy intensive companies exposed to international markets qualify for the Supercharger support package.

It is welcome to note that Ofgem will begin a review of the costs allocated to energy bills in the summer (2025), but there is a wider need for consideration of how business users are supported in keeping their energy bills affordable. Some of the challenges faced by business users across the UK have been set out in Energy UK’s recent report looking at reducing non-domestic energy prices.^[11]

Building necessary network capacity and reinforcement ahead of need

Network operators are unable to make anticipatory investments under current price control frameworks and can at present only consider how to incorporate new data centres once they receive an actual application from a data centre developer. It then takes significantly longer to build the required network infrastructure than the time taken to build the data centre, particularly when the connection requires an upgrade to the transmission level, when a connection triggers wider reinforcement. A more strategic approach to network delivery is needed, with significant work being undertaken by NESO and others to develop this approach and enable more strategic investment ahead of need.

Accessing a timely electricity network connection and minimising network demands

Beyond the challenges inherent to a lack of anticipatory investment, there are significant delays, technical challenges, administrative burdens, and inconsistent processes across connections at all levels of the electricity network. Some GB sites are offered connections as late as 2035, while others are offered a phased connection, limiting their access to the network in the first phase, with many experiencing heavy delays for subsequent phases required to get full connection. The need for 24/7 access to energy makes this option unviable for many data centres without wider mitigation.

Connection reforms are being implemented to accelerate the connection of energy assets to the system, alongside planning reforms to enable faster buildout of networks. The prioritisation process for connections that considers strategic need currently focusses on energy generation sites and does not currently include coordinated consideration of the connection of new demand such as data centres.

Work is now underway across NESO, Ofgem and Department for Energy Security and Net Zero (DESNZ) on the process for certain kinds of large demand within both the reformed connections queue and the wider strategic approach to system planning. Further examination of the challenges faced across the distribution level and the integration of anticipated demand across UK regions is still needed, as set out by the National Infrastructure Commission report on electricity distribution networks.^[12]

Data centre developers, much like in other sectors, can find it hard to access consistent information on network availability, connection times, and costs until they have already submitted an application. A rapid increase in the number of data centres unable to secure timely grid connections in the USA led to the installation of stand-alone gas-fired systems for some parties. On-site and ‘private wire’ power assets can reduce costs and timelines for data centres to be made operational, but their viability depends on space and site characteristics.

Managing energy system and emission impacts

Progress has been made to increase the efficiency of data centres, given the impact on operating costs and pace and cost of connections. A key area for further improvement is the development of low-carbon cooling technologies and options to utilise waste heat. Waste heat from data centres has significant potential as a source of low-cost, low-carbon heating where these are closely located to large heat users, as evidenced by projects like the Old Oak and Park Royal Development Corporation (OPDC) heat network in London.^[13]  The OPDC has received £36 million of Government funding to construct a heat network using waste heat from data centres to provide heating to over 10,000 homes and 250,000m² of commercial space.

Elsewhere, Germany has introduced mandatory reporting and minimum energy efficiency standards, where data centres must achieve between 10% and 20% reused energy, with exemptions in place.^[14]

In GB, most data centres currently in development are connected to the electricity grid with inefficient diesel back-up generators to use if their power supply fails. To meet environmental rules, they must limit operating hours to fewer than 50 per year and are prohibited from entering into flexibility markets, so can’t use this back-up capacity to contribute to efficient system operation.

An alternative to this approach would be to use battery storage, or potentially cleaner and more efficient gas turbines, with the potential for low-carbon gas to be used in future. These systems could provide the dual function of back up supply to the data centre and dispatchable generation to the grid if designed with that dual function in mind.^[15]

Access to low-carbon energy sources

New demand is welcome in some areas of the country where excess renewable generation is otherwise curtailed but could be more challenging to manage in others. Coordinating data centre development, and wider demand changes, with the build-out of clean power generation could help to maximise the use of low-carbon electricity and deliver lower energy bills across the UK.

Only some types of data centres can be located far from end-users, and these require a range of incentives and frameworks to know where to locate. For example, some estimates project that up to around 1GW of data centres could be based in Scotland, near to the ~10GW of wind farms currently in that country. Scotland only accounts for 10% of GB electricity demand, so much of the power generated is transported to England. However, where there is congestion on the grid, at present many windfarms are paid to stop generating (curtailed) by the system operator as the grid capacity is developed.^[16] A much more complex analysis of the potential for locating demand closer to generation is required before commenting on whether or not this would be a viable alternative to transporting that energy to existing demand centres in the south of GB via significant network upgrades.

Scotland’s wind capacity is set to grow by up to 30GW by 2030 in line with carbon targets and increasing demand for electricity as large amounts of heating, transport, and industry electrify over the coming decade. New data centres, alongside additional network reinforcement and investment in new networks, could help to maximise the amount that this wind capacity is used, increasing the utilisation of low-cost, low-carbon power.

Managing the impact on peak electricity demand

Data centres serving different functions have varied operating requirements and electricity consumption patterns. Many data centres have a relatively stable ongoing consumption profile and so will have limited scope to adjust their demand over time – this has led a number of data centres to contract with nuclear power stations in the USA. Regardless, it is important for all end users, including data centres, to be encouraged and incentivised to respond to fluctuating wholesale prices, system costs and wider market incentives to reduce their impact on the system and reduce their energy bills.

This could involve both demand turn-up at times of high low-carbon generation and demand reduction to move consumption away from peak demand, reducing the size of the electricity system. Many data centres, especially those that own their own data racks, can provide some demand-side response (DSR) by either load shifting – reducing computing demands by sharing tasks between sites or delaying non-time-critical operations, or by using their own generation and storage to manage their usage at peak times.

As the scope for large-scale demand shifting is often quite limited, on-site generation or investing in additional energy storage capacity (not intended to provide back-up generation), are likely to be the most realistic options to enable data centres to engage in DSR and reduce electricity consumption at peak times, or to reduce the size of their network connection overall.

Wider non-energy challenges

Data centres have a large physical footprint, with the largest site in development equal in size to nine football pitches. These will need to compete with other demands for land, including housing, food production, and energy generation.

Water availability also needs to be considered as different systems use different levels of water, and the type of cooling system used impacts energy use. Energy-efficient designs incorporate passive cooling to reduce water and energy demand from cooling. Air cooling systems can be used in water constrained areas, but these use more energy than evaporative systems.^[17] Some of the areas with high demand for computing capacity are in water-scarce areas such as the Oxford-Cambridge corridor.

Case study two: Siemens Energy closed-loop cooling system for data centres

In response to the growing concerns over water scarcity and the need for sustainable energy solutions, Siemens Energy has developed an innovative closed-loop cooling system that can be used by data centres. This system not only enhances energy efficiency but also significantly reduces water consumption.

The closed-loop cooling system leverages small gas and steam turbines in a combined cycle to increase plant efficiency from 48-50% to over 90% using absorption chillers. The high-grade steam generated from the gas turbine boiler drives a steam turbine, boosting efficiency from 37% to nearly 50%. The low-grade heat is then utilised by the absorption chiller, further increasing efficiency to over 90%. The cooled water from this chiller loop, maintained at 7°C, can be used in a closed-loop cycle to cool a data centre.

Traditional evaporative cooling methods for data centres require vast amounts of water. For instance, a 100MW data centre can use up to 760 million litres of water annually. In contrast, the Siemens Energy system only requires occasional top-ups to compensate for minor losses. The system can provide low-grade heat to supply district heating at around 36-40°C, offering affordable heating solutions to nearby businesses and homes. This technology has been sold to a European customer to provide heating, cooling, and power to a large events complex, and it will in combination supply heating to a local district heating network.

Solutions to power the Cloud

Across the challenges set out above, technical solutions are already available. The challenge is instead in the governance, strategic frameworks, and market arrangements to make these technical solutions and the surrounding business models viable, and to develop attractive customer propositions for data centre developers to encourage investment in the UK.

Provide additional low-carbon power

• The Government should engage closely with the technology and energy sectors to develop long-term clarity across policy areas and market signals aligned with the strategic intention for data centres and the need for a wide range of low-carbon generation and flexibility technologies.

The approach taken to electricity system planning must go beyond accelerating low-carbon generation projects to 2030. As the UK develops the Strategic Spatial Energy Plan, Regional Energy System Plans, and the Centralised Strategic Network Plan, these must include a strategy for longer-term coordinated build-out of a wide range of low-carbon generation, including flexible, dispatchable technologies, and electricity, hydrogen and Carbon Capture and Use and Storage (CCUS) network infrastructure to provide sufficient power to supply rising demand. This is expected from the growth of data centres but also from the electrification of industry, transport and heating, and other new demand like housing developments, with data centres acting as a potential case study to prove the efficacy of the approach.

The 2025 Spending Review committed to significant relevant funding, including more than £15bn in funding for nuclear generation projects and £9.5bn for Carbon Capture, Utilisation and Storage (CCUS).^[18] However, significant private sector investment will be required across all low-carbon and flexibility technologies to replace retiring generation and expand the system. Continued government policies to facilitate the roll-out of low-carbon generation, including the Contracts for Difference (CfD) mechanism and the Regulated Asset Base (RAB) mechanism, are therefore essential to drawing this investment to the UK in the coming years.

The CfD mechanism is expected to support the large bulk of new renewable generation. In addition, the RAB mechanism, and in future potentially CfD mechanism and commercial PPAs, could enable investment in additional baseload nuclear generation at different scales to provide power for data centres that have a typically constant demand. Examples of how energy and data centres can be coordinated can be seen in international markets where, for example, Microsoft signed a PPA to re-open Three Mile Island in the USA and, more recently, Meta signed a 1.1GW PPA with Constellation to finance a life extension at the Clinton Clean Energy Centre in Illinois.

Market signals across the energy sector should also be coordinated to give appropriate, long-term price signals that incentivise private investment. To enable the economic growth and investment potential presented by data centres, there must be pathways to the procurement of carbon-free energy and storage resources.

To encourage data centres and other businesses to enter long-term PPAs with new low-carbon assets, the Government should consider reforming current arrangements to certify low-carbon power.^[19] It is important to manage the potential impact of future policy changes, for example, the wider Review of Electricity Market Arrangements, considering locational signals, impact on current and future PPAs, and minimise wider investment uncertainty.

Manage energy system and emissions impacts

• The Government should work with other institutions to introduce guidance, advice, and requirements for all new data centres across planning and connections processes.
• The Government should consider the application of mandatory carbon reporting and reductions for data centres.
• The Government and Ofgem should review existing licence conditions, codes and guidance regarding private wire network solutions to assess if these remain appropriate.

The selection of AI Growth Zones as part of the UK’s AI Opportunities Action Plan should consider the likely energy systems impacts of major new data centres that can be located away from customers, to best coordinate location with areas that have existing or developing network capacity and the potential for adequate low-carbon energy supply.

It will be important for the Government to work with NESO, Ofgem, and industry to introduce guidance, advice, and even specific requirements for all new data centres, linking these to processes and conditions for network connection and planning permissions, to establish best practice and set minimum standards e.g. for energy efficiency and ability to connect to heat networks, building on international standards e.g. those in Europe and the US.

The Government should require mandatory carbon reporting for all data centres, requiring developers to consider, for example, what is required to secure access to low-carbon power from the grid or on-site. Those installing gas generation as a bridging solution before full or partial grid connection can be secured should be set mandatory carbon targets that ensure a move away from gas as the primary power source.

Cleaner forms of back-up capacity should also be encouraged. Changes to environmental permitting would encourage a move away from diesel generators to cleaner gas and electric technologies. These technologies could then be expanded and coordinated with others to enable data centres to participate in DSR activities.^[20],[21]

Wider changes to licence exemptions could encourage a range of solutions – for example, the use of clean private-wire networks incorporating generation and storage – and can more broadly optimise and standardise network connection processes across network operators.^[22] The impact of any new on-site or private wire generation on other electricity market participants and system operation needs to be considered further.^[23]

Building necessary network capacity and reinforcement ahead of need

• The Government and NESO, working alongside industry via the AI Energy Council and wider engagement, should look to quickly establish clarity over the optimal locations and likely energy impacts of additional data centre investment in the UK.
• NESO and the Government should look to ensure that Spatial Strategic Energy Planning arrangements at all levels consider demand implications for the system.
• Ofgem, energy networks, and NESO should consider the potential for changes to existing frameworks to enable faster connections for data centres.

To enable better planning and more proactive and strategic building of the networks required, more understanding of the likely future demand and location of data centres across the UK needs to be established quickly as part of the work of the AI Opportunities Action Plan. This can then be factored into longer-term network planning by NESO, which will subsequently flow through to future network price controls.^[24]

Longer-term strategic network planning needs to then look further out to consider likely investment not just across data centres but the whole economy. As NESO establishes an approach to strategic spatial planning and the Government selects its preferred approach, consideration of the estimated impact of changes in demand, whether due to electrification or the connection of new developments, must be core to the approach taken.

In the shorter-term, reforms could be made to the regulatory regime to enable Ofgem to approve more anticipatory spending by network companies but would need full consultation beforehand to mitigate unintended consequences. This could include changes to the way reinforcements are paid for, considering the potential for sharing costs across multiple new users, as well as consideration of how strategically identified sectors could be prioritised in the connections process, particularly when willing to pay for the cost of reinforcement directly.

Accessing a timely electricity network connection and minimising network demands

• The Government, Ofgem, NESO, and network operators should work collaboratively with the sector to establish an effective strategic approach to connecting new demand and aligning this with local low-carbon generation capacity.
• The Energy Networks Association should develop further guidance for data centres looking to connect.

Tools on likely costs and timing of network connection in different areas of the network, such as the welcome guidance being developed by the Electricity Networks Association (ENA) for vehicle fleet operators, should be adapted to provide information for data centre operators.

To prioritise the connection of the remaining new data centres and other end users Government should introduce strategic reforms to network connection for demand, following on from the reforms being implemented for generation. These may need to be less prescriptive in nature for most demand users and would need to be based on clear principles around wider social, economic and environmental factors to enable connections for new demand users like data centres to be prioritised against other connections. Prioritisation could be given to those that can be built in areas with significant curtailment of renewable generation and therefore absorb excess renewable generation.

Data centre developers should be encouraged to immediately reduce their system impact by installing low-carbon on-site energy options and agree to some DSR, potentially by partnering with near-by end users able to offer flexibility, to enable earlier connection dates. The demand connection capacity requirements detailed in the Security and Quality of Supply Standard (SQSS) 3.5.1 should be clarified. This clarification could help to ensure that those connecting new demand, while permanently reducing their maximum demand needs through flexible technologies, are recognised as holding a lower network requirement, resulting in a lower cost to connect.

NESO could also consider the introduction of holding bays for potential new data centres in strategic locations, as is currently done for Pathfinder innovation projects.

Reducing electricity prices

• The Government should urgently review the cost of energy for non-domestic users and consider removing some legacy policy costs from non-domestic electricity bills and review network charges.

Action is required to make GB electricity prices more competitive in the short to medium term. One way to do this quickly would be to remove Climate Change Levy (CCL) payments and legacy renewable policy costs from non-domestic electricity bills. Energy UK has assessed different options and impacts of various actions in our review of non-domestic policy costs.^[25]

Network charging reforms, such as reducing network charges for data centres that participate in DSR or targeted exemptions as set out in more detail in the next section on energy policy signals, may help reduce both data centre operator and wider system costs.

Alongside this, market reforms could help encourage data centre operator investment in DSR reducing data centre electricity costs as wholesale prices become more volatile and provide operators with additional revenue streams as set out below in the section on minimum standards and improving opportunities for DSR.

Using energy policy signals to encourage location in mutually beneficial areas

• As part of the anticipated review of network charges, Ofgem should consider how specific sectors could be treated to align with the Government’s desired outcomes.
• The Government should look to clarify long-term direction for market frameworks where possible, engaging fully with the energy sector.

There is potential for some types of data centres to move to areas more aligned with efficient energy system operation, though a wide range of factors and impacts will need to be considered. As outlined above, network connection is likely to be the largest energy-related driver of location in the near term, but network charges also have the potential to provide a fairly strong locational signal. Under Ofgem’s review of network charges, the regulator should consider the options for a strategic locational signal for demand, and options for exemptions for strategically needed sectors like data centres.^[26]

Ensuring data centres based in more built-up or industrial areas are, where possible, built close to current and future heat networks, and considering the options for mandating connection to these networks would also be welcome.

Through the Review of Electricity Market Arrangements, the Government has been considering introducing zonal pricing, which would provide a locational price signal in the wholesale market. Introducing locational signals for energy demand could potentially encourage specific types of data centres that are which are able to locate away from customers, such as AI training centres, to invest in locations with excess renewable capacity. However, the strength of this signal would be expected to fall over time as other non-commodity costs increase and wholesale costs fall as a proportion of the overall electricity bill.

If zonal pricing is introduced, wholesale prices alone may not, therefore, send a sufficiently strong locational signal, particularly as zonal pricing frameworks would take time to design and implement, in which time many developers will have progressed along the process of acquiring land, planning, and utility connections. There are also a range of factors beyond energy prices which influence where large demand centres might be situated, such as local planning, skills availability, and utility connections. Zonal pricing could also raise prices for data centre developers and operators that need to be based in areas closer to customer demand, deterring investment.

Experiences in Norway and Sweden suggest that zonal pricing alone is unlikely to drive locational investment decisions.^[27] Long-term clarity on the market framework for the electricity sector and how locational signals are provided for demand will help to guide investment decisions across the UK.

Consider the impact on wider sectors

• The Government should assign the National Infrastructure and Service Transformation Authority (NISTA) to review strategic coordination of land, water, energy, and wider sectors in planning and investment frameworks.

Interactions with other key sectors, including water, agriculture, housing and industry, need to be carefully managed. Policy levers beyond energy, including tax incentives and planning reforms, will need to be applied to encourage investment in optimal locations, balancing the full set of considerations. Reforms to planning could range from incentives to fast-track options for critical industries. The Government should also create a registry of data centres in development (potentially through the RESP process) to enable other sectors to plan. This work could be led by the newly created National Infrastructure and Service Transformation Authority (NISTA).

Minimum standards and improving opportunities for DSR

• The Government and NESO should explore options for minimum standards for data centres and measures to better incentivise and enable flexibility.

Data centres can potentially operate in flexibility markets, including those with a locational element, such as local flexibility markets (including constraint markets building on NESO’s Constraints Collaboration Project) as well as national options via the Balancing Mechanism.[28] This may be through managing demand, either as a single asset or via aggregators where this is viable, or through the use of on-site generation or storage. AI Growth Zones may focus on the provision of DSR and low-carbon flexible energy solutions that are typically only possible at scale, with a competitive market for these solutions already emerging.

The Government should look to ensure that new data centres can technically provide DSR and that leasing or other commercial arrangements don’t preclude it, taking into account site characteristics and data centre type, while also making DSR more attractive for all users. A range of changes would be required to deliver this approach, some of which are already in progress and others which require additional workstreams and resources to deliver. These proposed changes would help ensure that data centres contribute to efficient electricity system operation and help reduce the size of the electricity system needed, reducing bills for all consumers. It would also create new business models, accelerating investment in low-carbon technologies and innovation.

• Flexibility markets need to be designed in a way that encourages the economic participation of all options for larger-scale demand flexibility, including data centres. Revenues from flexibility markets need to be sufficiently attractive to overcome the administrative burden of participating and/or the loss of workload capacity. This requires action to address structural problems impacting the business case for flexibility, including rules preventing revenue stacking and barriers to capacity market access.^[29]
• As well as making flexibility markets more attractive, the Government should work with NESO to determine the minimum flexibility requirements, technical and commercial, for existing and new data centres to ensure impacts on security of supply and overall system costs are minimised. This could, for example, set appropriate requirements for DSR capability set at a certain percentage of connection capacity for data centres over a certain threshold and be factored into planning requirements.
• As outlined above, changes to network connection could also drive DSR in new data centres seeking network connections. Lessons can be learnt from the USA, where programmes are seeking to reduce the peak demand from data centres to speed up grid connections and enable the growth of the sector (see case study three below).
  

Case study three: Data centre load management in the US

In 2024, the U.S. Department of Energy recommended flexible data centres and, as a result, the Electric Power Research Institute (EPRI) launched its Data Center Flexible Load (DCFlex) initiative to demonstrate how data centres can support and stabilise the electric grid. The initiative aims to deploy five to 10 large-scale flexibility hubs and develop a blueprint for utilities, market operators, technology innovators and policymakers.

A study found that just a small amount of peak shaving (reducing demand at peak times) will enable a much greater capacity of data centres to be connected to the system without increasing peak demand or the capacity needs and costs of the system.[1]

Data centres in the US are starting to optimise certain tasks or move them between sites, and using periods of low temperatures to reduce cooling electricity demands. They are also looking at using on-site or leased natural gas or energy storage installed as bridging generation until they can get grid connection.

In the US there are well established demand side response programmes that reward a range of end users for shifting electricity demand, but these were designed for existing firm loads. Network operators are now starting to offer earlier network connection for data centres willing to curtail a small proportion of their load. New controllable load services are being established in several US states, but they need to be standardised and rolled out more widely.

Conclusions

To deliver on the clear potential set out for both the technology and energy sectors in this space, a collaborative, cross-cutting, mission-led approach to delivery must be adopted. The powerful potential for AI and data management to deliver cost-reducing solutions and for the coordinated technology and energy infrastructure delivery to deliver cost-effective utilities and services for consumers means this approach is critical to delivering the Government’s policy objectives.

Utilising this opportunity and bringing technology and energy investment to the UK requires effective engagement with both industries in the immediate future, followed by tangible actions that direct investment and clear the barriers across policy and regulatory frameworks. Implementing the recommendations in this report in full partnership with industry will go some way to enabling the UK to seize on the opportunities provided by low-carbon technologies and AI.

The challenges faced by data centre developers are being experienced by a range of consumers, investors, and developers across the energy system as the GB economy continues to decarbonise. As such, addressing these challenges must be considered as part of a holistic modernisation of the delivery of GB utility infrastructure. Given the sheer scale and pace of changes across the energy, utility, and planning policy areas, coordination across existing change processes must be a critical part of the process to ensure that data centre connections are considered as part of the bigger picture.

The energy sector is eager to continue to work with the Government, Ofgem, NESO, planning and environmental authorities, and the technology sector to maximise the benefits from the delivery of the AI and energy ambitions of the UK.

For more information about this report, please email rachel.cary@energy-uk.org.uk, charles.wood@energy-uk.org.uk or press@energy-uk.org.uk.

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[1] Statista (2025), Leading countries by number of data centers as of March 2025

[2] BCS Consultancy (2025), Powering the future

[3] TechUK (2024), Foundations for the future How data centres can boost UK economic growth

[4] BCS Consultancy (2025), Powering the future

[5] NESO (2024), Future Energy Scenarios

[6] National Infrastructure Commission (2025), Electricity distribution networks: Creating capacity for the future

[7] International Energy Agency (2025), Energy and AI

[8] The Royal Society (2023), Large-scale electricity storage

[9] Energy UK (2025), Powering Growth: The economic opportunities unlocked by nuclear

[10] Data does not consider the impact of subsidy schemes such as the British Industry Supercharger introduced in Spring 2024

[11] Energy UK (2025), Reducing non-domestic electricity prices to drive economic growth

[12] National Infrastructure Commission (2025), Electricity distribution networks: Creating capacity for the future

[13] Hemiko (2025), OPDC

[14] TaylorWessing (2025), Waste heat from data centres – new reporting obligations under the EnEfG

[15] These could be fuelled by HVO, methanol or biodiesel until a low-carbon hydrogen supply becomes available. The data centre industry is already using gas turbines in other countries. Hydrogen ready gas turbines from Lincoln have recently been sold for data centre supplies in the USA. The Equinix DB5 Data Centre in Dublin uses 9 x A05 small gas turbines

[16] Carbon Tracker (2023), Britain wastes enough wind generation to power 1 million homes

[17] Equinix (2024), What Is Water Usage Effectiveness (WUE) in Data Centers?

[18] HMT (2025), Spending Review 2025

[19] Energy UK (2024), Maximising the Corporate Power Purchase Agreement market

[20] DESNZ, DEFRA and Data Centres could agree a streamlined environmental permit process for hydrogen ready gas turbines fuelled by HVO, methanol or biodiesel and hydrogen in the longer-term.

[21] Air Quality regs (Medium Combustion Plant Directive) prevent diesel backup generation providing DSR

[22] Current private wire exemptions assume 100% load factors and are capped at 100MW total customer demand under licence exemption C. To better optimise network connection and encourage private wire generation the threshold should take into account likely load factors so that larger schemes with lower load factors could be installed to serve individual data centres. This would also enable larger private wire generation and storage systems that serve a number of data centres could be installed and run at higher load factors.

[23] Data centres would also need to install export metering and make changes to control systems on sites to enable them to participate in markets.

[24] RIIO-T3 is the price control for the period from 1 April 2026 to 31 March 2031. Data centre planning is therefore probably less likely to feed into the initial T3 submission given the timing but will need to feed into the Transitional Centralized Strategic Network Plan 2 (TCS P2) refresh Q1 2026, Strategic Spatial Energy Plan. SSEP Q4 due to come end of 2026. Centralised Strategic Network Plan (CNSP) due in 2027.

[25] Energy UK (2025), Reducing non-domestic electricity prices to drive economic growth

[26] Ofgem, 2025, Recovering the costs of energy infrastructure investment from customers

[27] Zonal markets exist in Norway and Sweden however there is no data centre in the north of Norway, and the recent Tiktok is in the same zone as Oslo. In Norway, energy is cheap everywhere due to hydropower. Zonal differences exist but are outweighed by better fibre connectivity in southern regions (e.g. Oslo, Stavanger), streamlined permitting, pre-approved sites, and proactive government engagement and strong green credentials with most sites marketing as 100% renewable. Facebook has located in Northern Sweden driven by a range of factors as part of an industrial strategy, but most data centres are clustered around Stockholm.

[28] NESO, 2025, Constraints Collaboration Project

[29] Energy UK (2025), Response to Ofgem consultation on Market Facilitator Policy Framework (February 2025)