UK grid connections reform
More changes ahead for data centres and electricity demand connections

The introduction of a financial mechanism, for both new and existing data centre applications, with the aims of deterring applications from non‑viable projects, encouraging proactive self‑termination of such projects and driving timely project progression. Two main options remain:

• a refundable deposit paid at the time of application or upon accepting an offer, with the amount returned (as a single payment or a staged return) once specified milestones are reached; and
• a progression commitment fee (similar to that already available in respect of generation applications), in which the deposit amount increases over time and the obligation to pay arises if a project fails to satisfy particular progress criteria, with the deposit then refunded once the required milestones have been achieved. 

An upfront non‑refundable fee, payable at the time of application or offer acceptance was initially considered but was discounted in the Ofgem SoR. 

The upcoming Ofgem consultation will include details of the financial mechanism scope, applicability period, value and acceptable payment methods. The consultation will also address the treatment of projects that change the type of use of their connection in the development stage (e.g. from generation to a data centre or vice versa). The Ofgem SoR notes the importance of allowing projects to change use or technology, and that Ofgem's current view is that projects which change use or technology shouldn't be charged more than other projects, but emphasises that the right behaviours must be incentivised. Developers with existing connections should monitor this to understand what flexibility there is to adapt their connections. 

Ofgem is also undertaking further work to understand the interaction of any additional financial mechanism with the securities regime. Its current view in the Ofgem SoR is that both the financial mechanism and securities will be applied without offsetting each other. This work sits alongside the ongoing CMP417 code modification process proposing to align demand and generation cancellation securities.

To ensure that only sufficiently mature projects can receive a Gate 2 connection offer or retain their existing queue position, Ofgem is considering strengthening readiness requirements for data centres. In the Ofgem CfI, Ofgem initially proposed that these requirements could function as criteria for Gate 2 entry, requirements for receiving a connection offer for distribution-level projects or post-offer progression milestones. Ofgem has now confirmed in the Ofgem SoR that it is only developing post-offer milestone-based requirements, applicable to both transmission and distribution-connected projects.

Readiness requirements under consideration include:  

• financial project backing (eg, credit rating or letter of credit requirements) prior to the existing queue management milestone 7 (project commitment) date;
• initiation of procurement of long-lead items (eg, an invoice or contract with a supplier for transformers) around the time of queue management milestone 2 (secured consents);
• securing a commercial offtaker or anchor customer, potentially with a staged approach requiring initial evidence early in the queue management process and more stringent requirements at a later date; and
• developer track record.

Ofgem considered, but is minded not to take forward, additional requirements in relation to obtaining planning permission, provision of flexibility or participation in sustainability initiatives as additional readiness or progression requirements. 

As part of Ofgem's Phase 2 workstream, additional measures to strengthen project commitments and address applications from non-viable demand projects other than data centres will be considered. Further details are expected later in 2026.
 

Government will publish a list of strategically important demand projects, including AI Growth Zones, in a designated strategic plan using powers introduced under the PIA. Such Government-identified demand projects would be treated as NESO-designated projects under the Project Designation methodology and could be prioritised in relation to (i) any released queue capacity that is to be re-allocated; (ii) reservation of future network capacity; and (iii) in the connections queue formation in future application rounds. 

The DESNZ Consultation relates to prioritisation of transmission connections only but DESNZ is separately considering amendments to the connections methodologies, or a parallel process outside of the methodologies, so that distribution-connected projects can be prioritised in same way. 

The changes, if implemented, are expected to be in place (at least at transmission-level) before the opening of the next connections application window and will affect the queue position of projects applying for a new import connection, as well as potentially providing strategically important demand projects already holding a Gate 2 offer with a route to accelerate their connection date.

Future data centre connection applications could be required to be strategically aligned (in a similar way to most generation and storage connection applications under the current connections process) to regional infrastructure targets set out in a data centre strategy. Protections would be available for data centre projects in advanced stages of development.

DESNZ expects that strategic alignment of data centres would be in place for the second post-G2tWQ connections application window.

Government also sought industry views in the DESNZ Consultation on the introduction of auctions to allocate capacity for strategic demand connections. It is not currently clear when any such mechanism would be implemented. Ofgem recognised in the Ofgem SoR that there are concerns that auctions to reserve and reallocate capacity for strategic demand could favour a developer's ability to pay over the project's readiness or wider system value.

As large-scale demand grows, more demand projects are requiring high-voltage transmission connections. Ofgem have confirmed that it will make changes, using its PIA powers, to make self-build, ownership and transfer of high-voltage assets easier. 

In November 2025, Ofgem issued guidance confirming that connecting demand projects to the transmission system at high voltage is not prohibited under the Electricity Act 1989 (EA 1989). Having initially indicated that it would also clarify its interpretation of the EA 1989 as to whether developers can construct or own high‑voltage assets for data centres or other demand uses and provide guidance on what activities are permissible for sole‑use assets, Ofgem has now confirmed in the Ofgem Connect Update that it will not provide such clarification as it would be unlikely to be able to provide the necessary certainty to developers. 

Ofgem is instead prioritising development of a new standardised independent transmission owner (iTO) licence, analogous to the existing independent distribution network owner (iDNO) licence. Ofgem is also including considering how the iTO licence would interact with the competitively appointed transmission owner (CATO) regime and whether the CATO regime could be used to facilitate delivery of certain projects. 

Ofgem, NESO and Government are also considering whether a class exemption could be used as an additional option for high-voltage asset ownership for certain types of project or to allow demand customers to undertake commissioning activities for self-build and transfer. 

Ofgem aims to consult on its initial proposal for the iTO licence, and on the relevant code modifications, in Autumn 2026.

To support earlier connections and wider consumer-side flexibility, Ofgem, NESO and Government are considering a range of alternative connection agreements and the extent to which such arrangements would be investable. Under consideration are phased or ramped connections involving a gradual increase in connection capacity as project development progresses, non‑firm connections allowing earlier connection in exchange for accepting curtailment during system constraints and other flexible connection models. Key points for investors will include whether any such alternatives are voluntary and are backed by clear, standardised terms. For any non-firm connections, the level of curtailment and the extent to which curtailment provisions are time-limited will be critical to being investable.

Ofgem are aiming to provide an update on connection agreements, including the proposed timescale for achieving any required policy reform, in Autumn 2026.

Options are being explored for certain types of large demand to provide voluntary flexibility services to better facilitate wider system operation and potentially secure earlier connection dates. In the Ofgem Connect Update, industry feedback is welcomed on options that would be suitable for each demand type, noting that the ability to participate will depend on each development's use and business model.

Next steps include Ofgem reporting to the AI Energy Council in Autumn 2026 on increased use of voluntary flex services by data centres, including opportunities within the existing policy framework and areas for policy reform. Ofgem expects to provide clarity on policy direction and any regulatory change prior to the next connections application window but has noted that full policy implementation may not be complete by then.
 

Ofgem is considering whether additional backstop control measures, including mandatory curtailment, are required to ensure the system can continue to withstand stress events. Whether such measures are needed will partly depend on the uptake of voluntary flex measures and alternative connection agreements by data centres. If any form of mandatory curtailment is introduced, this could have a significant impact on the investability of large demand such as data centres and prompt the need to have access to additional on-site back-up power supplies.

Ofgem intends to consult on any potential measures during Autumn 2026, including confirming whether any mechanism is required, how it will be implemented and an impact assessment.

As large demand loads increase, new system operation challenges are expected to arise. Ofgem intends to update technical standards and codes to address this, including standardising infrastructure design and engineering principles, where possible, to facilitate self-build.

Ofgem expects to consult on the updated technical standards as part of its self-build and ownership consultation in Autumn 2026.