Once shaken, now stirred: Winter 2025 power update for data centres and other large energy users

The last few weeks have marked a pronounced tipping point for data centres and other sites with very large energy requirements, with such developments now being recognised in the regulatory direction of travel as an important and distinct part of our electricity system in their own right. 

This Law-Now provides a comprehensive update on the various interrelated policy updates in this area, and is essential reading for those considering power strategy for data centre and other large power consuming developments.

It includes an explanation of the strong signals that have now been given in respect of data centre/demand focussed grid connection reform, the potential for locational signals via electricity discounts for data centres located in “the right place” for the wider energy system, and greater private sector involvement in transmission voltage infrastructure.

Latest publications and scope

This Law-Now addresses energy regulatory reform discussed in the following recent publications:

• Ofgem Demand Connections Update: the Demand Connections Update published by Ofgem on 6 November 2025.
• NESO Call for Input: the Demand queue call for input issued by the National Energy System Operator (“NESO”) to demand customers on 6 November 2025, as referenced on NESO’s website.
• Connection Terms Letter: the joint Government-Ofgem Open Letter to network operators regarding network connection terms published on 11 November 2025.
• AI Growth Zones Paper: the Developing AI Growth Zones policy paper published by the Government on 13 November 2025

The table below summarises the key areas of reform discussed in this Law-Now, identifies the relevant publication(s) proposing these changes and highlights the types of projects likely to be most affected. The remainder of this Law-Now is structured in line with the rows of the table.

A note on AI Growth Zones

This Law-Now focuses on the AI Growth Zone Paper’s proposals in the energy context. (See our separate Law-Now on the planning aspects.)

Given the favourable policy environment for data centre projects, as well as the extent to which recent increases in demand connection applications are attributable to data centres - it is unsurprising that data centres appear to be shaping the development of energy demand policy. While some of the measures outlined in the AI Growth Zones Paper, such as energy cost relief, are stated as targeted exclusively at data centres within AI Growth Zones, others are likely to have broader relevance and application for a wider pool of “strategic” demand projects.

The Government is currently inviting applications from industry and local authorities for designation as AI Growth Zones. To date, AI Growth Zones have been established in South Wales, North Wales, Oxfordshire and Northeast England. Further announcements are expected and the Government has indicated that the application process for additional AI Growth Zones will “stay open indefinitely”. 

Issue 1: Energy costs

Background

The House of Commons Energy Security and Net Zero Committee noted in its report on its cost of energy inquiry that, “[t]he UK’s industrial electricity prices are the highest in Europe and around four times higher than the US and Canada”, resulting in “severe competitive disadvantage”, particularly for projects with large energy usage. Among the recommendations in the report was the introduction of a voluntary energy bills scheme to help businesses to stabilise their energy costs.

Policy levies (funding government energy policy initiatives such as the Contracts for Difference regime) and network charges make up a significant proportion of a typical energy bill. In this regard:

• As noted in our previous Law-Now, the Government has proposed in its Industrial Strategy to expand the reliefs from policy levies already enjoyed by certain specific “energy-intensive industries” to the Government’s focus sectors. It is not clear however that this would cover data centres.
• A central proposal in the Government’s summer 2025 update on its Review of Electricity Market Arrangements is to pursue reforms to transmission network charges to strengthen the locational signals they send to developers.

Latest proposals

The Government has now committed to “develop a targeted pricing support mechanism” for AI Growth Zone data centres, where located in particular areas of the country. Locating these projects in places that reduce pressure on electricity networks can in turn reduce the constraint costs that are incurred in balancing the transmission system. The AI Growth Zones Paper envisages a discount on energy bills that is “commensurate” to such constraint cost savings, up to stipulated caps for each such area.

The Government has indicated that the caps on these discounts for a hypothetical 500MW data centre would be:

• £24/MWh in Scotland
• £16/MWh in Cumbria
• £14/MWh in Northeast England

Issue 2: Further connection reform for transmission-connected demand

Background

Following Ofgem’s approval of NESO’s radical Connections Reform package (as explored earlier in its implementation in our previous Law-Now) in April 2025, we are at the stage in the process where developers with existing transmission connection arrangements should have now submitted evidence to NESO to enable the reshuffle of the transmission connection queue. Developers are expecting to receive in December an indication of whether they will be issued a “Gate 2” offer with a committed energisation date (rather than an indicative “Gate 1” offer).

A key feature of the original Connections Reform package was that transmission-connected demand projects do not fall within the scope of the additional “needed”/“strategic alignment” filter applied to generation projects – which applies a hard cap on connection capacity available to different types of projects in each different region. In contrast, currently the only criterion demand projects must satisfy to qualify for a Gate 2 offer is “readiness” (based on e.g. land rights and/or planning status).

The Ofgem Demand Connections Update however highlights a sharp increase in contracted demand capacity – from 41GW in November 2024 (17GW transmission, 24GW distribution) to 125GW in June 2025 (97GW transmission, 29GW distribution), with data centre projects driving a significant share of this increase.

Proposed measures

Ofgem has identified an urgent need for a “targeted intervention” to manage the surge in demand applications and address the risk of misallocating resources and undermining network planning. While light on detail, the latest publications envisage measures including the following to manage the demand queue, improve ascertainment of ‘viable’ projects and prioritise projects designated as strategic.  Although the proposals primarily target demand projects at transmission level, Ofgem expects distribution network operators to review and, where necessary, update their connection processes to promote greater alignment between distribution and transmission requirements and procedures.

 1. Introducing demand-specific requirements to demonstrate project viability

Ofgem has indicated that it is “considering whether there are demand-type-specific requirements that may be  needed for certain sectors or technologies to ensure that viable projects are able to demonstrate their maturity” in order to retain a grid connection offer.

Ofgem has said these requirements will be informed by data on existing demand project characteristics gathered through the NESO Call for Input from developers with transmission connection arrangements. Therefore if you hold a demand transmission connection offer do look out for this and consider the feedback you wish to provide.

While the precise further criteria to be used to distinguish between demand projects remain to be defined, potential factors could include specific technology type (e.g. AI vs cloud data centre), the anticipated development timetable and parameters such as ability to accommodate phased delivery, ramped capacity or self-build infrastructure.

The nature of these questions set out in the NESO Call for Input suggests that a further phase of Connections Reform for demand projects may follow, meaning the current “Gate 2 to Whole Queue” process, and any associated outcomes, may not represent the final position.

 2. Expanding the scope of security requirements

One means of developers demonstrating “financial readiness” is through the provision of security, committed funds or even a fee or auction payment. Under the present regime, developers must provide security to cover potential liabilities if their transmission connection arrangements terminate. Currently, the potential amount of this security is significantly greater for demand developers than generation – although industry proposals under CUSC modification CMP417 seek to close this gap.

In addition, Ofgem has indicated, in a consultation published on 20 October, that it is minded to approve the introduction of a new “progression commitment fee”. This fee is proposed to apply to projects with a Gate 2 connection offer that have yet to initiate planning applications to meet queue management milestone 1 under their connection agreements. It would initially be dormant, with fees only activated by NESO if connection queue health deteriorates. Once triggered, it starts at £2,500/MW and rises by £2,500 every six months (capped at £10,000/MW), with security posted until queue management milestone 1 is met. While only generation projects are within scope at present, Ofgem has suggested that there is merit in assessing whether a similar regime could be considered for demand connections.

 3. Prioritisation and strategic designation of demand projects

The Ofgem Demand Connections Update signals an intention to accelerate those demand projects which are designated by Government as “strategic”. Among the potential levers that Ofgem identifies to achieve this are:

• The exercise of powers under the Planning and Infrastructure Bill (currently before Parliament), which would enable the Government or Ofgem to direct network operators to amend existing regulatory processes and connection terms.
• Further development of NESO’s Connections Reform Methodologies to provide expressly for the prioritisation of projects strategically designated by Government, enabling such projects to benefit from capacity reservation or other prioritisation measures.

The AI Growth Zones Paper adds further colour to the measures that both the Government and Ofgem are expecting to see in the context of “strategic” demand projects, including:

• The creation of capacity reallocation and reservation mechanisms which will provide for (i) the reservation of capacity for strategic demand projects (before they are able to demonstrate the requisite degree of readiness to obtain a Gate 2 offer); and (ii) the priority reallocation of capacity relinquished by projects that are terminated out of the queue (e.g. for failing to meet their queue management milestones) to strategic demand projects.
• The introduction of a “Connections Accelerator Service” which will offer enhanced engineering support for strategic projects to resolve connection delays, with a pilot expected before end-2025. It is noted that all data centre projects within AI Growth Zones will qualify for this bespoke service, reflecting the Government’s recognition of AI as a key growth priority.

Issue 3: Reform of connection terms

Background

Terms for connection to transmission and distribution networks vary widely across the industry, and in principle currently provide very limited recourse for developers where connections are not delivered on time. Our previous Law-Now provided an overview of Ofgem’s connections end-to-end review of the regulatory framework – this review looks at ways to make network operators’ connection terms more robust, clear and ambitious (e.g. by optimising energisation lead times and providing hard obligations to deliver connections within those lead times).

Proposed measures

The Connection Terms Letter notes that the outcome of the connections end-to-end review will be published in the “coming weeks”; in the meantime, it sets out a clear expectation that network operators ensure that the new connection terms they are issuing pursuant to the Connections Reform process are compatible with the “direction of travel” of that review.

Issue 4: Private-sector-led development of transmission assets

Background

An array of mechanisms currently exist in principle for private sector involvement in the development of onshore transmission system infrastructure, each with its own limitations:

• The CATO regime allows the private sector to tender to construct and own (on a licensed basis) transmission infrastructure – but NESO controls when tenders are instigated, and certain qualifying criteria must be met;
• Demand developers with transmission connection arrangements can construct the last-mile / “contestable” aspects of the infrastructure required for their connection – but this is currently subject to a two-kilometre limitation and inherently involves such assets ultimately being adopted by the relevant incumbent licensed transmission owner; and
• It is in principle possible for DESNZ to grant an exemption from the requirement for a transmission licence, which would open up involvement in transmission infrastructure ownership for the relevant exemption recipient – but there are, so far as we are aware, no examples of this having been done for onshore transmission infrastructure to date, and current guidance contemplates such exemptions will be granted in only “exceptional circumstances”.

Proposed measures

The Ofgem Demand Connections Update notes that:

• Ofgem is exploring solutions for “enabling greater ownership and operation of high voltage assets” (in this context we take this to mean transmission voltage); and
• Industry proposals on expanding transmission contestability (i.e. customer self-build for adoption by the incumbent transmission owner) beyond the current two-kilometre limit (CUSC Modification Proposals 330, 374 and 414) “should be treated as a high priority”.

In the AI Growth Zones Paper, the Government confirms that it is “rapidly” developing solutions for both “build and transfer” and “build and operate” models for private-sector-led transmission infrastructure in the context of AI Growth Zone projects.

Overall implications

Although many elements remain subject to further consultation and code change, for data centres and other large demand users, the direction of travel is sufficiently clear to warrant assessing whether early preparatory steps may be beneficial. Such assessment may focus on two areas, firstly ensuring that projects can meet a higher bar on readiness and programme deliverability; and, second, positioning to benefit from the new preferential pathways for strategic demand.

Near‑term actions could include updating internal gatekeeping around readiness and aligning project schedules with credible delivery windows. Developers may also wish to map portfolios against areas likely to benefit from AI Growth Zone policy signals and explore contestable or self‑build solutions – while recognising that any advantages related to capacity reservation, queue reallocation or pricing support will ultimately depend on final policy design.

Stakeholders have until 5 December to respond to the Ofgem Demand Connections Update and/or the NESO Call for Input.