Power

Data centres consume a lot of power and require a stable connection and a reliable back-up. Data centre developers face two key power-related risks: connection risk and commodity risk.

Securing a grid connection is one of the most significant barriers to data centre development. There is currently a long queue of projects in the UK waiting to connect to the grid, with wait times of up to ten years. The current approach to grid connection is one of “first to contract, first to connect”. This has given rise to a number of “zombie projects”, which are applications that are speculatively submitted to establish a place in the queue, but then fail to proceed.

The government is taking steps to address this, and recently published the Connections Action Plan setting out its proposals for connection reform. The key takeaways for developers are the move to a “first ready, first connected” approach, and the acceleration of viable “priority projects” in the connections queue. Whilst these are welcome reforms, the go-live date for the new process is not until January 2025, and data centres have not been specifically identified as “priority projects” in the Plan. The impact of these reforms on data centre development therefore remains uncertain.

The thinking behind these reforms was to release capacity that was being held up by speculative/ stalled projects and get ready-to-go developments up and running more quickly. Whilst this is a sensible proposition, we expect difficulties for speculative development/funding, where the timeline for power connection cannot be guaranteed.

Power risk does not end with grid connection. Every data centre operator will also face a considerable cost driver in its operations: energy costs. Electricity price risk can be managed through effective power supply agreements, with fixed costs or hedging arrangements in place. However, electricity suppliers now increasingly insist on supplier-friendly standard terms, with tariff variation mechanisms and cost pass-throughs, thereby reducing price certainty.

Location

As the increasing demand for data centre capacity from AI companies unfolds, it is predicted that there may be less need for data centres to be located near to urban centres that ensure low-latency responses. Data centres need large areas of land, so spaces that offer scale with capacity to expand in locations with strong accessible links to lots of renewable energy (think solar and wind farms) will be key.

Sustainability

Sustainability of any new development should be a top priority. Customers are increasingly focussed on the green credentials of data centre operators and as the use of sustainability-linked loans and green loans increases, funders will want to see a development meeting the funding sustainability criteria too.

In recent years, there has been a trend among data centre companies to use sustainable financing to fund their decarbonisation efforts and help to achieve sustainability goals. As the demand for digital services continues to surge, data centres are under increasing pressure to address the environmental impact of their operations, particularly energy and water consumption. Green finance allows data centre developers to access capital with more favourable terms, while also showing their commitment to their ESG performance and mitigating the risks associated with regulatory changes and reputational damage.

Technology

Technology used in data centres is changing fast and any development needs to allow for those changes. For example, cooling technology is reported to be making fast advances this year and thought should be given to whether the site has capacity for additional service media required for the cooling and if it is even possible.

Construction

Data centres rely on power connectivity and cooling ability, so the M&E installation will be critical so having a construction team on board with sufficient experience of data centre design and implementation will be vital.

People

As the data industry expands at lightning speed, attracting the right and sufficient talent to design, implement and run the data centre will become more difficult. A workplace that is attractive to employees with the right onsite facilities, in a location that is accessible (or appealing) to a skilled workforce will help.

Navigating the planning maze

A key element for any project is securing the necessary planning consents, and the route to a robust consent for a data centre can encounter some common pitfalls.

Use class conundrum

It’s not unusual to consider uses in terms of their use class, and there can be clear advantages to this. It helps us group similar uses together in our mind in terms of what is, or isn’t, likely to be acceptable to landlords or local planning authorities, and can dictate which permitted development rights might be available.

However, there remains some debate as which use class, if any, data centres fall into.

Some LPAs have viewed them as B8 – focusing on the storage of data as the key characteristic of the use. However, this classification often doesn’t fit comfortably, in particular because the impacts, for example demands on power, job generations and traffic movements, can differ significantly between storage and data centres. Alternatively, some LPAs view the use as more akin to office or light industrial – both now within use class E.

Crucially, though, sometimes the use is deemed to fall outside of all use classes, instead being a “sui generis” use. This means not only that there needs to be a specific permission for the use, but it also doesn’t benefit from any use related PD rights. Planning permission will always be needed to change to, or from, the use.

This inconsistency between LPAs creates uncertainty, and means that it is important to understand the position of the relevant LPA before submitting a data centre planning application, or introducing a data centre use to existing premises with planning permission for any other use.

Other planning problems

Even where there is clarity on the planning permission needed, there are other planning obstacles to navigate including:

• Allocations risk - many local plans don’t plan specifically for data centres, making the most relevant allocation one for employment use. However, typically LPAs want employment land to generate significant numbers of jobs – not something that data centres are famed for. Consequently an LPA may judge data centre applications harshly, as they reduce its ability to deliver employment opportunities in its area.
• Competing uses - it is generally accepted that data centres are power hungry. This can cause perceived conflict with other development proposals, if the data centre is judged to subsume the available energy capacity. For example, recently there have been suggestions that residential development in some parts of England, including those with planning permission, cannot proceed because data centres in the area have taken all local energy capacity. Given the acute need for homes in many areas of the country, this perception – even if unfounded – needs to the tackled head on as part of any application strategy.

Next steps

There is a myriad of practical issues to look out for when building and investing in data centres in the UK in 2024. If you are looking to bring forward or invest in data centre developments we at Hogan Lovells would be delighted to help you to achieve this. Please reach out to any of the Contacts listed here and we would be delighted to help you.

In our second article in this series we will drill down into how responsible data centre lease clauses can work to lessen the environmental impact of these facilities, and help owners and occupiers to meet their ESG targets. Look out for this on Engage shortly.