Ofgem proposes to increase costs and tighten grid connection procedures for larger data centre projects

Introduction

On 29 July 2026 Ofgem launched a consultation proposing a new data centre commitment fee payable by large data centre developments when accepting a grid connection offer, set within a proposed range of £237,500 to £712,500 per MW (approximately 2.5% to 7.5% of average project costs). This fee would be refundable upon energisation and forfeited if the project exits early. Alongside this, Ofgem is consulting on new data centre-specific queue management milestones requiring developers to demonstrate financial capability, commercial maturity, and procurement activity to retain their queue position.

Ofgem acts to free up grid capacity by tackling speculative data centre projects | Ofgem

The Problem

The scale of the data centre connection demand queue is creating a major impediment to the UK’s AI growth potential. As of March 2026, Ofgem analysis shows that approximately 73 GW of the total demand queue are data centres, comprising around 315 data centre projects with total contracted capacity ranging from 1 MW to 1,500 MW. Of the 73 GW in the queue, approximately 50% (116 projects) of the MW capacity is for extra-large projects (100 – 500 MW) and 43% (40 projects) is for hyper scale projects (500+ MW). For comparison, peak electricity demand in GB on 11 February 2026 was 45 GW.

Ofgem has also found a fair number of projects are speculative which it considers is linked to the cost of entering the grid connection queue being very low.  The central challenge therefore is to strike an appropriate balance between deterring speculative and non-viable data centre developers from holding connection capacity and adding unduly burdensome costs to viable, non-speculative developers.

The Queue Management System

Over the past two years, the National Energy System Operator (NESO) under the Energy Act 2023 has introduced a queue management system called Target Model Option 4 + (TMO4+) for generator connections to the grid. Connections are priorised based on first ready and needed rather than first come first served. A new gate system was introduced whereby those projects which can demonstrate readiness (planning, land, funding) and aligned to the Government’s Clean Power 2030 targets are placed in Gate 2 with earlier connection dates and those unable to demonstrate required criteria placed in Gate 1 with much longer timelines for connection.

For demand side projects, such as for data centre power, lower voltage connections to the distribution system (through the Distribution Network Operator) are out of TMO4+ scope (but with a queuing mechanism in the Energy Networks Association guidance) but higher voltage transmission connections (through the Transmission Operator) are in scope although developers do not need to demonstrate CP 2030 alignment.

The Solution

Despite tighter queuing mechanisms being introduced, the demand remains significant. Ofgem recently consulted the data centre industry in a Call for Evidence where a clear majority of respondents expressed support for the introduction of a data centre commitment fee (63% in favour).

Four data centre commitment fee design options were consulted on with Ofgem opting for a lump-sum returnable commitment fee in the range of £237,500/MW to £712,500/MW, which represents around 2.5% to 7.5% of an average data centre project’s capital expenditure of £9,500,000 per MW. On Ofgem’s analysis, this means that a data centre with a requested connection of 100 MW will have to secure £23.8 million to £71.3 million at the point of accepting a connection offer.

This fee is in addition to those projects connecting to the transmission system which are required to provide security deposits to cover connection-related costs incurred by transmission operators.  Securities seek to protect consumers from the costs the network companies incurs if a connecting party withdraws.

Ofgem propose that the data centre commitment fee would be applied to projects that have a capacity equal to or above 40 MW which connect to the transmission system or connect to the distribution system and are above 40 MW and are subject to a Transmission Entry Assessment (TEA).  TEA is used to capture all circumstances where interface with NESO is initiated to assess the impact of a project on the transmission system.

In addition to the proposed commitment fee, Ofgem is also consulting on improved data centre queue management milestones. These would require developers to provide evidence of project progression at specific stages of the connection process.

Requirements include demonstrating a credible compute customer or end-user, procurement of long-lead electrical equipment, financial capability, and technical readiness. Separate pathways are proposed for self-operated facilities and projects intended for lease or sale, reflecting different commercial models within the sector. Projects failing to meet these requirements could lose their queue position.

The commitment fee and milestone framework are intended to operate as a coherent package.

Exemptions and Limitations

Ofgem proposes that the data centre commitment fee should be applicable from connection offer acceptance to energisation and will be secured at that point using a similar mechanism to existing security provision. It also proposes to exempt data centre projects from the commitment fee where their energisation date is within six months of the fee being introduced. Also, Ofgem proposes to offer a grace period for data centres with a connection offer which has been signed, or if a data centre has received an offer but not yet signed.

Implementation is proposed through the existing regulatory arrangements and agreements. Importantly, the Planning and Infrastructure Act 2025 confers powers on the Secretary of State and Ofgem to modify relevant documents (principally regulatory documents such as licences, codes, methodologies and existing connection agreements) for the purposes of improving the process of managing connections to the electricity transmission and distribution systems.

Ofgem has also considered its obligation under Section 6 of the Human Rights Act 1998 due to potential interreference with property rights.  It is considered that the proposals strike a fair balance between the public needs pursued and the individual interests of those involved.

Conclusion

With the UK being one of the world's largest data centre markets, the number, size and strategic importance of UK data centres is growing as AI adoption increases.

Power for data centres has been and continues to be a significant barrier to the continued roll out of data centres across the UK. Statutory mechanisms are now in place to implement a set of proposals which should deter speculative and non-viable data centre developers from holding connection capacity.

The question now is will the proposals add unduly burdensome costs and procedural measures to viable, non-speculative developers?  Whilst there was general support for the commitment fee proposal from industry, the costs could be significant. As the UK pursues digital sovereignty building domestic capability and strategic leverage in critical technologies, it will be important that the costs and more burdensome procedural measures do not cause real project developers to look elsewhere.

It will clearly be important for the data centre industry to engage with Ofgem on these important proposals.

If further information and advice is required, please contact Kevin Gibbs or Mark Bailey.