Post: Connection is the new location: what the Data Centre Covenant means for power and flexibility

Connection is the new location: what the Data Centre Covenant means for power and flexibility

Alongside the Autumn Budget on 28 October, the government published the Data Centre Covenant. In this article we take a look at the document, intent behind it and what it means for energy flexibility.

The connection bottleneck

According to the government, the UK is already the third-largest AI market globally (behind the US and China) and hosts more AI start-ups than anywhere else in Europe. As AI adoption grows, demand for that infrastructure will grow with it. Countries that can host and power data centres will ensure their sovereignty, strengthen economic resilience, and be better placed to capture the benefits of the digital economy, and help shape the future of AI. To protect the national interest, the government estimates that the UK will require 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 electricity. Ofgem estimates that data centres make up around 73GW of the demand connections queue. This compares to GB peak demand in 2025 at roughly 45GW. While many of these projects may be speculative, the gap between what’s been requested and what the network can deliver is real.

Faster access will come with flexibility attached

Published on 28 October alongside the Budget, the Data Centre Covenant sets out five tests. All data centres are encouraged to meet them; but those wanting to be treated as “strategic” must meet them:

• energy costs: pay a fair share of system costs and make credible commitments for the capacity they ask for
• communities: invest locally, through a Local Benefit Plan scaled to the size of the development
• environment: design for a Power Usage Effectiveness (PUE) of 1.3 or better, keep water use down (closed-loop cooling, for example) and reuse waste heat where there’s someone nearby to use it. Strategic sites will report energy and water use every year
• jobs and supply chains: create local employment and prioritise UK suppliers and technology
• security: provide secure compute for the NHS and public services, share information with government and the National Cyber Security Centre, and go beyond baseline cyber standards

A new Ministerial Control Centre, chaired by the Minister for AI with Treasury and energy ministers alongside, will use powers under the Planning and Infrastructure Act to help strategic projects get connected faster. That could mean reserving future grid capacity, reallocating capacity freed up when other projects drop out of the queue and, if needed, facilitating the transfer of pre-2030 connection contracts. For the small number of projects deemed “exceptionally strategic”, temporary on-site generation may be allowed as a bridge to a grid connection.

Currently the tests are policy rather than law, but the draft National Policy Statement for Data Centres, published the same day, could see several of them become law.

To flush out speculative applications, the government is also backing Ofgem’s proposed queue management reforms, including a new Data Centre Commitment Fee. For projects above 40MW connecting to or affecting the transmission system, the fee would mean putting up refundable security of £237,500 to £712,500 per MW from the point an offer is accepted until energisation. Break the rules or abandon the project, and it’s forfeited.

Ofgem is also proposing tougher progression milestones for data centres of 10MW or more, including projects already in the queue (with grace periods). Developers would need to show a credible end user or self-operation plan, evidence of long-lead electrical equipment procurement, and the financial and technical capability to deliver. Speculative build-to-lease sites would need non-binding customer evidence within six months of accepting an offer, then binding offtake for at least 20% of compute capacity for a year or more. A decision is expected in Q1 2027.

Faster access comes with flexibility

The government is clear that getting connected sooner may mean accepting a different kind of connection. In its consultation response on “Accelerating electricity network connections for strategic demand”, the government calls flexible connections “a proportionate and necessary intervention”. The response, also published on 28 October, sets out a range of options: non-firm or lower-resilience connection agreements, phased or ramped capacity, hybrid arrangements that mix firm and interruptible supply, and voluntary flexibility services. As a last resort, it’s also exploring a power for the system operator to direct large users, data centres included, to temporarily curtail demand.

That changes how data centre developers should think about their sites. A facility that can shift, shed or shape its demand when the network is under stress, backed by on-site batteries, smart controls and the ability to respond to grid signals, is a much easier thing to connect early. It’s also a facility that can earn revenue from that flexibility rather than treating it purely as a constraint.