What the 2026 UK Budget means for data centres
Author: Joe Peck
The Chancellor used his Budget speech on 28 October to launch a “British Data Centre Covenant”, promising faster grid connections and temporary on-site power for strategic sites. Much of the detail, including who will qualify, is still to come.
Data centres had a dedicated section in Chancellor John Healey’s Budget speech, with the headline announcement being a new British Data Centre Covenant: a deal under which operators that meet “strict tests” on local investment, jobs, and water protection can secure government help to get connected to the grid.
The Chancellor framed the move around sovereignty and security, telling MPs that when the NHS uses AI to treat patients, “we want that data here”, and that the same applies to the armed forces.
The Government estimates that the UK will need 6GW of AI data centre capacity by 2030, roughly three times its current operational capacity of around 2GW.
What the Covenant asks of operators
The new Covenant sets out five tests, covering energy costs, local investment, environmental standards, skilled jobs, and national security. All data centres are encouraged to meet them, but they become mandatory for “strategic” data centres seeking enhanced government support. These are:
• Energy: Strategic sites must make credible commitments for the grid capacity they request and contribute towards the energy system costs their developments create.
• Local benefit: Applicants must produce a Local Benefit Plan, drawn up with local stakeholders and scaled to the size of the development. Funds can be directed to local priorities such as transport, parks, and town centre improvements.
• Environment: Expectations include minimising water consumption, using closed-loop cooling where possible, reusing waste heat, and publishing annual reports on energy and water use. Operators are encouraged to publish total and peak water consumption and water usage effectiveness (WUE), and the Government will explore the use of treated wastewater for cooling. It has also indicated that it would consider a statutory reporting framework if sufficient data is not forthcoming.
• Jobs and supply chain: Commitments to local jobs and apprenticeships and to prioritising UK suppliers. For the most strategic sites, this extends to contributing to British AI hardware.
• Security: Providing secure UK compute for the NHS and other public services, working with the National Cyber Security Centre.
What operators get in return
A new Ministerial Control Centre, chaired by the UK Minister for Artificial Intelligence, will decide which sites receive support. Using powers in the Planning and Infrastructure Act, the Government says it may reserve and reallocate grid capacity, as well as transfering pre-2030 connection contracts to strategic data centres. For exceptionally strategic projects, where other measures fall short, it will also allow tightly controlled on-site generation until a grid connection is available.
The package also includes support for Ofgem’s data centre commitment fee and queue management measures intended to deter speculative demand, more choice for developers to self-build connection infrastructure, and continued alignment of future connections with regional infrastructure capacity beyond 2030, taking land, water, and electricity constraints into account.
On planning, the Government has published a draft Data Centre National Policy Statement, which will set the decision-making framework for large projects seeking consent through the Nationally Significant Infrastructure Project regime. Projects with an indicative IT load of at least 100MW are expected to fall within scope. The consultation runs until 8 January 2027.
Sovereign AI and defence
The Covenant sits alongside an AI and cybersecurity package worth more than £700 million. It includes an additional £140 million for the Sovereign AI Unit, £120 million for the AI Security Institute, £165 million for a new National AI Biosecurity Initiative, and £154 million to strengthen cyber defences.
Of particular interest to the sector, the Ministry of Defence is assessing options to increase sovereign compute and data centre capacity on its secure estate. A facility colocated with existing defence innovation and testing infrastructure could ultimately offer secure compute access to UK small and medium-sized enterprises.
What it means for the sector
The industry response has been broadly positive, but with consistent caveats about delivery.
For Matthew Baynes, Vice President Secure Power and Data Centres, UK&I at Schneider Electric, the Covenant is “a significant opportunity for a new era of responsible data centre development, where investment in digital infrastructure delivers tangible benefits for local communities and the wider UK economy.” He singled out the power measures in particular, stating, “The commitment to prioritising grid connections for critical data centres, alongside enabling on-site power generation where necessary, is particularly encouraging.”
That on-site element could prove significant. Matthew argues that “behind-the-meter solutions, including microgrids, battery energy storage, and alternative generation technologies, can play a pivotal role in accelerating deployment, improving energy resilience, and reducing pressure on the grid.” He adds, “The opportunity now is for government, energy providers, and the data centre industry to work together to turn this commitment into action.”
Power costs, however, remain the sticking point for some. Mark Pestridge, Managing Director of Telehouse Europe, welcomed the Covenant as “a recognition of the vital role data centres play in supporting the UK’s digital economy and AI ambitions”, but warned that “electricity costs in the UK remain significantly higher than in much of Europe, presenting a major challenge to international competitiveness.” In his view, “ensuring the UK remains an attractive destination for long-term data centre investment will require greater focus on delivering affordable, reliable power.” Trade body techUK has also flagged energy affordability as a weakness of the Budget.
There is also the question of how far the new powers will shorten the grid queue, rather than simply reordering it. Reserving capacity, reallocating connections released by others, and transferring pre-2030 contracts largely move strategic sites up the line. Ofgem has said that the connection queue grew by 460% in the first half of 2025, with data centres accounting for at least 73GW of the pipeline, and grid delays are already shaping investment decisions. Microsoft reportedly walked away from Nscale’s planned Loughton site after the developer was told grid power might not arrive until the early-to-mid 2030s.
The on-site generation allowance could help bridge such gaps, but its value will depend on two things the Budget left open: how many sites are classed as strategic, and how quickly reserved capacity reaches them. The Government has said it will set out “in due course” how a strategic data centre is defined, and the Budget speech itself gave no thresholds or start date for the tests.
Finally, Lee Myall, CEO of Neos Networks, welcomed the plans to accelerate data centre development and improve grid access, but cautioned that “the same joined-up thinking needs to extend to digital connectivity, which will be just as important in enabling businesses across the country to capitalise on AI.” Neos’s research found that “connectivity constraints have forced 38% of large UK businesses to keep AI workloads more centralised than planned, while 34% have moved workloads to another region entirely.” He concludes, “Digital connectivity must be considered alongside power, planning, and other infrastructure priorities.”
What to watch next
Three things will determine whether the Covenant becomes a genuine catalyst for the sector: the definition of a “strategic data centre” and the final criteria for enhanced support; how much capacity the Government can actually reserve or reallocate, and by when; and the outcome of the draft National Policy Statement consultation, which closes on 8 January 2027.
For further insight, you can follow our ongoing coverage of the data centre sector in the UK and worldwide.
