Time to talk about the challenges facing UK data centre development

Last week CMS hosted a roundtable in London to discuss the challenges facing UK data centre development. We benefited from the diverse views of clients from across the DC market including sponsors, lending institutions and developers. 

There were several useful insights, with key takeaways summarised below, and the key themes being centred on the “3 Ps” of power, planning and people:

1. Power struggles:

It has recently been projected by Savills that European data centre power capacity will rise by a further 21% by 2027 – with even this increase representing a significant undersupply against the projected expansion of internet bandwidth usage. This is happening despite power networks and associated power regulation struggling to evolve against the strains of aged physical infrastructure, concentrations of power users in particular areas, electrification of energy usage generally – including notable demand from data centres, and managing distributed generation and intermittent renewables.

In the face of these challenges and the greater flexibility of data centre location for AI data centres in particular, it was a clear theme of the discussions that the sector is becoming ever more willing to look at non-traditional areas (in respect of the UK and further afield). While this may be driven by better grid capacity availability, a further power corollary of non-traditional areas will be larger sites with more potential for on-site power solutions – whether that be for greening purposes or for reducing reliance on the grid.

The immediate challenges and growing risks posed by the ongoing introduction of more stringent “use it or lose it” and “first ready, first to connect” provisions in grid connection arrangements and de-facto moratoriums on further grid connections in certain areas/jurisdictions cannot be ignored. However, taking a step back, it is clear the sector already has a story to tell on its positive impact on our energy systems and there is a great deal of potential for more of the same. Huge volumes of renewable generation projects across Europe and America are financially underpinned by long term corporate power purchase agreements and data centres can be energy providers as well as energy takers where they can find routes to market. The data centre sector and the energy sector are ever more intertwined and the solutions as well as the challenges may well be mutual, as was recognised by a number of those round the table.

2. Planning (or the lack of!):

Data centres find themselves in the mire of a UK planning system which is overly complex, is not fit for purpose, and does not cater for the unique nature of such developments. In particular, data centres do not benefit from a specific use class or any tailored planning policy at national or, in most cases, local authority level. This leaves consenting risk open to local priorities and politics – compounded by data centres having to compete with housing schemes and being tarred with an unfair perception that they offer minimal local benefits for local communities.

It was therefore reiterated by guests that we need much more direction from the next Government. We are at least now heartened to see reference to data centres starting to appear in manifestos, but all need to commit to raising our voices with the incoming ministers to drive a higher and more positive profile for the sector, with those politicians and the wider public.

Consenting regimes also differ markedly across Europe, which can make decisions on where to develop and invest quite challenging. This is considered in some detail in CMS’s Data Centre Consenting Guide, which we would encourage you to explore.

3. Location location location:

Given the scarcity of land in the popular and established FLAP-D regions and the UK hotspots west of London, where are people looking at in the secondary market to establish new campuses? New usages of machine learning and AI are less sensitive to issues of latency, so does this give other regions a chance?

Less traditional locations in the North West (Manchester) and North East (Doncaster) of England are already being explored by some of the guests’ organisations and others are keeping a close eye on the market. The overarching considerations remain power and consenting so, where those are favourable, people are keen to invest. But no particular location is yet emerging as the “new Slough”, and there remains difficulties in aligning opportunity with funding.

4. Hard times for construction:

Turning to an issue that is not confined to the datacentre world, but is a significant pinch point, the table considered procurement and delivery of the buildings and the difficulties faced by the construction industry.

The UK construction industry has been going through some difficult years, with supply chain insolvencies, material shortages, fuel prices, global armed conflicts, pandemics and labour unavailability to name some of the headwinds. The datacentre sector is not immune, with one guest commenting that in their view a shortage of people is one of the biggest challenges being faced, and these matters come into sharp relief in the context of delivering highly specialised assets to a demanding programme.

5. Put your money where it matters:

There are numerous financing structures used in the sector, such as real estate or development finance, corporate, leveraged, or project/infrastructure financing. These can be complex and many funders are using hybrids of development and project financings to develop data centres. There are also a number of macroeconomic headwinds facing the funding of DC development, including inflation, supply chain issues, political changes imminent in the UK and a high interest rate environment. Making sourcing of debt financing slightly more challenging than it was in the recent past.

Many of the established funders are looking to long term institutional debt providers (such as pension funds, life companies and insurers) to try to increase the universe of lenders involved and the pool of available liquidity. They want to introduce institutional tranches and to recycle their money. These types of institutions are highly risk averse, have ratings requirements and are subject to different regulatory regimes and strict governance and credit requirements. The inherent complexity of data centre assets (particularly their design, construction and extended and detailed commissioning) has made attracting this kind of debt, particularly for the construction phase, a significant challenge. Market soundings suggest, though, that those types of institutions remain keenly interested in, and focused on, the data centre development market.

Get in touch if you’d like to discuss any of the issues outlined above