How the Demand Connections’ reform will impact data centre development

On 11^th March 2026, the Department for Energy Security & Net Zero published its consultation on proposed measures to address the issue of speculative activity within electricity demand network connections. This is in line with the Government's commitment to reforming the demand connections' process. The measures that are being consulted on form part of Ofgem's 'Curate, Plan and Connect' triptych, as announced in the 'Demand Connections' Reform' Call for Input in February 2026.

The problem

In the past 12 months, we have observed an increased interest in data centre development, driven partially by TMO4+ (and the desire for developers with BESS projects in their pipeline to pivot to a more viable option, given saturation of the BESS connection queue) and the Government's identification of data centres as a 'frontier' sector in the UK's Modern Industrial Strategy (June 2025). As a result, NESO has seen a 460% growth of grid connection applications for connection at the transmission level in the period between December 2024 and June 2025.

NESO's Demand Queue Call for Input (November 2025) ("Call for Input") identified approximately 140 data centres in the transmission queue alone; this number does not represent the full picture (for instance, it does not account for data centres connecting at distribution level). Out of these projects, just over half of these data centres had achieved FID at the time of the Call for Input. Accordingly, there is a concern that many of these projects are speculative in nature, and holding up the development of more advanced and viable demand connection projects.

The solution

The Government intends to accelerate connections' reform with the aim of ensuring that only 'viable' and 'strategic' demand projects can be prioritised for connection. In the context of the reforms, viability is determined by a project's ability to secure planning permission and achieve final investment decision ('FID').

The Government had already indicated its intention to take action to "accelerate connection times for specific AI Growth Zone sites" in the policy paper that launched the 'AI Growth Zones' in November 2025 and the present consultation, along with Ofgem's most recent Call for Input (closed on 13 March 2026) and the ongoing consultation on amendments to the TM04+ methodologies, intend to achieve this goal. 

The 'Curate' pillar

Under the 'Curate' pillar of the Demand Connections Reform the measures proposed by Ofgem in its February 2026 Call for Input, are intended to 'strengthen queue entry and membership requirements' to ensure that only viable projects will remain in the queue.

Ofgem is consulting on the introduction of the following three measures:

1. Data-centre specific financial mechanism (applicable at point of application or offer acceptance), which will be rolled-out across demand projects in due course; and
2. Updated securities' regime for demand connecting at transmission level; and
3. Data-centre specific amendments to the 'readiness' requirements of the 'Gate 2 Readiness Criteria', which, again, will be rolled-out across demand projects in due course.

In more detail:

Financial mechanism: This could take the form of:

1. A refundable deposit, due at the point of application or offer acceptance;
2. Progression Commitment Fee, similar to the Progression Commitment Fee that has been approved as part of the TM04+ package of measures;
3. A non-refundable deposit, due at the point of application or offer acceptance.

It is our view that the requirement for a refundable deposit that is returned in increments (such increments aligned to the delivery of certain milestones), would both incentivise self-termination of non-viable projects and would provide a clear incentive to data centre operators to progress their project with all due diligence. If such a mechanism is implemented, care needs to be taken to ensure that developers are not inadvertently penalised where delays in progress are not directly attributable to the developers conduct.

Readiness requirements: At present, only transmission-connected demand forms part of the TM04+ reforms (and consequently the Gate 2 Criteria Methodology). Ofgem is considering how the readiness requirements set out in the Gate 2 Criteria Methodology could apply to distribution-connected data centres.

Ofgem has not outlined a prescriptive list of options in this respect, but it notes that it is considering including a requirement for the project to have obtained either outline or full planning permission and/or being able to demonstrate financial backing.

Complementing the measures that are being consulted on by Ofgem, the Government proposes using powers granted under the Planning and Infrastructure Act 2025 (PIA) to amend the TM04+ connection methodologies, applicable codes (including the CUSC) and licence conditions to implement the agreed upon measures.

Timing: The expectation is that such agreed measures will be in place before the next Gated Application window opens (likely to be towards the end of Q3 2026). The measures are expected to apply to both transmission and distribution projects equally. Ofgem has emphasised that it will consult further on the proposed measures in 2026.

The 'Plan' pillar

Under the Plan pillar of the Demand Connections Reform the Government will identify transmission-connecting demand projects it considers ''strategically important'' (including AI Growth Zones) and will seek to rely on powers granted under the PIA to ensure that NESO prioritise such projects for capacity re-allocation (where there is project attrition) and capacity reservation (including through batched queue formation exercises in the future). The identification of projects as "strategically important" is expected to be done through Government plans or strategies, which will subsequently be identified as 'strategic documents' to which NESO needs to have regard.

This could have a significant impact on queue formation, allowing for the reservation of capacity for 'strategic demand' projects that are not necessarily as well advanced to connect earlier than they would have done otherwise (or which are as advanced as other less strategically important projects). In this context, Government-designated projects will be treated in the same way as NESO designated projects.

The Consultation defines a 'Strategic Demand Project' as a "Government-identified demand Project eligible for the proposed Prioritisation mechanisms". So far, the Connection Accelerator Service has been used for the identification of 'Strategic Demand Projects'. This involves the nomination of a project from a government department, Mayoral Strategy Authority of devolved government and the assessment of the project against prescribed economic and social criteria. We anticipate that, following the demand connections' reform, the process will be streamlined through the identification of 'Strategic Demand Projects' as part of an overarching Government plan.

The Consultation alludes to the introduction of Strategic Alignment criteria, whereby data centre connections need to be aligned to infrastructure targets in specific areas of the country, as outlined in a data centre strategy. This proposal has echoes of the Clean Power 2030 Plan and the Strategic Spatial Energy Plan. If the baseline assumptions and data used to formulate the data centre strategy are correct, such strategy has the potential to provide strong signals to potential investors. The Government is keen to emphasise that protections will be put in place for advanced, 'viable data centre projects' that are not aligned to the proposed infrastructure targets.

Timing: The expectation is that any measures under this category will be implemented on the third Gated Application window. The Government's priority is to tackle the transmission projects first, with distribution projects to follow.

The 'Connect' pillar

Under the Connect pillar of the Demand Connections Reform, Ofgem is considering different ways of accelerating the connection of physical infrastructure to the grid. Options under consideration include:

1. Greater ability for developers to self-build transmission lines (where agreed with NESO);
2. Establishment of a new independent transmission owner licence (iTO);
3. Mandated flexibility participation for data centres.

The Consultation also hints at the possibility of requiring data centres that connect to the grid to provide a minimum level of flexibility as a pre-requisite to maintaining such a connection. That could be an attractive option, which facilitates an earlier connection date. However, any such viability needs to be considered in the context of available back-up power (which typically takes the form of diesel generators). It is also very likely that data centre operators will only curtail demand where they are legally obliged to do so (and, where, the penalties for not doing so are significantly high).

Timing: The proposals under this pillar are subject to further consultation, to take place in Spring 2026 and their implementation is likely to extend beyond the next Gated Application window.

Auctions

There is a passing, but noteworthy, reference to capacity auctions in amongst the proposals tabled by the Government. Whilst the proposal is light in details, it is a nod to the request made to PJM Interconnection (the largest US wholesale electricity market) by the Trump administration in January 2026 to hold a 'one-off' capacity auction to allocate capacity to data centres. Such request was in response to the unprecedented growth of data centre power demand in the USA, which created important questions around the affordability of power.

Whilst the possibility of capacity auctions is, in theory, an interesting proposition, there are many questions which arise in relation to its implementation (particularly around timing, considering the ongoing work on TMO4+ and the remaining measures under consideration).

What next?

The Consultation closes on 15 April 2026. Whilst this article has focused on the impact of the proposed reforms on data centres, both transmission and distribution demand projects (e.g. large manufacturing facilities and port infrastructure) will be affected by the proposed reforms. It is therefore important that the Government is provided with robust evidence to make decisions on the direction of travel. If you would like further information on the proposals or support with submitting a response to this consultation, get in touch to discuss how we can help.