Data centre developers to pay fee to keep connections offer
UK energy industry regulator Ofgem has set its sights on weeding out unviable data centre projects from the demand connections queue.
Ofgem intends to introduce a financial instrument which would require prospective data centre developers to pay a fee to keep their place.
Targeting unviable data centres would be the first phase of wider reforms to the demand connections system.
It comes after a surge in demand connection applications between November 2024 and June 2025, during which total contracted offers in the demand queue rose sharply from 41GW (17GW transmission, 24GW distribution) to 125GW (97GW transmission, 29GW distribution).
Ofgem’s call for input on its proposed reforms states that the rise in applications “exceeds even the most ambitious demand forecasts” and has been primarily driven by data centres.
Initial findings from the National Energy System Operator’s research into the UK demand queue – launched last year – suggest that a significant portion of projects in the queue are data centres. It identified around 140 data centres with a capacity of 50GW, the majority of which it said are likely to receive a Gate 2 offer to connect.
As such, Ofgem said it is “appropriate” to focus the first phase of its reforms on data centres as “they account for a large proportion of projects in the demand queue, far beyond forecast future need and what the system can reasonably support, and their connection requirements have large system impacts”.
Its call for input adds: “We expect a significant number of projects in the demand queue to be non-viable. […] These non-viable projects are potentially blocking important demand projects – such as those data centres required for government’s AI Growth Zones programme – from progressing to connection, whilst sending materially inaccurate signals about required network build and infrastructure investment.”
It adds that there are currently “insufficient measures in place to incentivise non-viable projects to exit the connections process early enough”.
As such, Ofgem’s first action will be the introduction of a financial mechanism to weed out projects which are unlikely to ever connect.
It has proposed three options for its financial mechanism. The first would be a refundable deposit which would be paid at point of application or offer and either refunded as a lump sum once a certain milestone had been met, or incrementally as the project progressed.
The second option would be to introduce a progression commitment fee, similar to what has been introduced for generation projects. This would take the form of a deposit that would increase over time and become payable if projects fail to meet certain progression criteria and be refunded when specific a milestone is achieved.
The third option, which Ofgem is seeking feedback on, is the introduction of an upfront non-refundable fee paid at the point of application or offer acceptance. Ofgem says “this would deter applications and encourage proactive self-termination”.
Ofgem said it is also considering how to strengthen its readiness requirements for data centres to ensure only sufficiently mature projects are able to receive a Gate 2 connection offer or retain their existing queue position.
Potential strengthened readiness requirements Ofgem is considering include: evidence of broader financial project backing, outline planning permission (submission or consent received), or full planning permission or consent.
The regulator plans “to move at pace over the coming months to design, consult on, and implement the Phase 1 reforms, ensuring the demand connections queue does not grow further due to new applications from non-viable data centres or other non-viable projects, and ensuring network companies are able to prioritise strategic projects identified by government”.
In parallel, Ofgem will also begin initial work on the second phase of reforms, which will assess evidence, data, and the case for developing a financial mechanism and strengthened readiness requirements for other demand types.
Its approach to Phase 2 will be set out later in 2026.
“While data centres create distinct challenges for the demand connections process, it is essential that the system supports all types of demand project to progress towards connection,” the call for input adds.
Ofgem intends to introduce a financial instrument which would require prospective data centre developers to pay a fee to keep their place.
Targeting unviable data centres would be the first phase of wider reforms to the demand connections system.
It comes after a surge in demand connection applications between November 2024 and June 2025, during which total contracted offers in the demand queue rose sharply from 41GW (17GW transmission, 24GW distribution) to 125GW (97GW transmission, 29GW distribution).
Ofgem’s call for input on its proposed reforms states that the rise in applications “exceeds even the most ambitious demand forecasts” and has been primarily driven by data centres.
Initial findings from the National Energy System Operator’s research into the UK demand queue – launched last year – suggest that a significant portion of projects in the queue are data centres. It identified around 140 data centres with a capacity of 50GW, the majority of which it said are likely to receive a Gate 2 offer to connect.
As such, Ofgem said it is “appropriate” to focus the first phase of its reforms on data centres as “they account for a large proportion of projects in the demand queue, far beyond forecast future need and what the system can reasonably support, and their connection requirements have large system impacts”.
Its call for input adds: “We expect a significant number of projects in the demand queue to be non-viable. […] These non-viable projects are potentially blocking important demand projects – such as those data centres required for government’s AI Growth Zones programme – from progressing to connection, whilst sending materially inaccurate signals about required network build and infrastructure investment.”
It adds that there are currently “insufficient measures in place to incentivise non-viable projects to exit the connections process early enough”.
As such, Ofgem’s first action will be the introduction of a financial mechanism to weed out projects which are unlikely to ever connect.
It has proposed three options for its financial mechanism. The first would be a refundable deposit which would be paid at point of application or offer and either refunded as a lump sum once a certain milestone had been met, or incrementally as the project progressed.
The second option would be to introduce a progression commitment fee, similar to what has been introduced for generation projects. This would take the form of a deposit that would increase over time and become payable if projects fail to meet certain progression criteria and be refunded when specific a milestone is achieved.
The third option, which Ofgem is seeking feedback on, is the introduction of an upfront non-refundable fee paid at the point of application or offer acceptance. Ofgem says “this would deter applications and encourage proactive self-termination”.
Ofgem said it is also considering how to strengthen its readiness requirements for data centres to ensure only sufficiently mature projects are able to receive a Gate 2 connection offer or retain their existing queue position.
Potential strengthened readiness requirements Ofgem is considering include: evidence of broader financial project backing, outline planning permission (submission or consent received), or full planning permission or consent.
The regulator plans “to move at pace over the coming months to design, consult on, and implement the Phase 1 reforms, ensuring the demand connections queue does not grow further due to new applications from non-viable data centres or other non-viable projects, and ensuring network companies are able to prioritise strategic projects identified by government”.
In parallel, Ofgem will also begin initial work on the second phase of reforms, which will assess evidence, data, and the case for developing a financial mechanism and strengthened readiness requirements for other demand types.
Its approach to Phase 2 will be set out later in 2026.
“While data centres create distinct challenges for the demand connections process, it is essential that the system supports all types of demand project to progress towards connection,” the call for input adds.
