Budget offers datacentres faster grid connections under new covenant

New incentives, new funding

The government has announced plans to give critical datacentre projects priority access to electricity grid connections in return for commitments to create jobs, support local communities and protect water supplies.

Chancellor John Healey unveiled the British Data Centre Covenant in his 2026 Budget speech on Wednesday, saying the agreement would help accelerate infrastructure development needed to support the country's AI ambitions and national security requirements.

Under the proposed arrangement, operators that meet the covenant's requirements will also be allowed to build new on-site power generation while waiting for permanent grid connections.

The measures are intended to address one of the biggest obstacles facing Britain's expanding datacentre industry, as demand for electricity rises alongside investment in AI.

Grid delays threaten AI ambitions

Britain is the world's third-largest AI market, behind the United States and China, and aims to triple its AI-capable datacentre capacity by 2030 to avoid becoming overly dependent on overseas infrastructure.

The country already has Western Europe's largest datacentre market, with more than 520 facilities. However, much of its existing infrastructure is not equipped to handle the power-intensive workloads associated with advanced AI systems.

Industry experts have repeatedly warned that delays in securing electricity connections are holding back new projects. Microsoft recently withdrew from an agreement with Nscale to be an anchor tenant for a large site in Essex, reportedly due to grid connections taking years longer than originally expected.

The new covenant is intended to make it easier for strategically important developments to proceed while ensuring that local communities benefit from the infrastructure being built around them.

Healey said the government needed to support the opportunities created by AI while guarding against its risks.

"We are already world leaders in AI safety and security, which today's budget backs with an extra half a billion pounds," he said.

"Built on sovereignty and security, I want to ensure that the British can benefit from the huge potential upsides of AI."

Some operators have already welcomed the proposed covenant, particularly its commitment to prioritising electricity connections for critical projects. Gary Watson, managing director of UK operator Stellanor, described the agreement as "the right deal". Gary Wojtaszek, executive chairman and interim chief executive of Pure Data Centres Group, also welcomed the announcement.

New funding targets AI safety, skills and public services

The Budget also includes several measures designed to strengthen Britain's AI capabilities, improve public services and better understand the technology's economic consequences.

A £15m AI Challenge Prize will reward innovative applications of AI in public services, with its first award focusing on health issues. The initiative is intended to encourage solutions to common problems and demonstrate how AI can improve public service delivery.

The government has also allocated £23m to an AI Economics Institute, which will examine AI's effects on productivity, economic growth, employment and living standards. A further £18m will support a new UK Advanced Chip Design Academy to develop specialist semiconductor design skills and strengthen links between British research and advanced chip manufacturing.

The AI Security Institute will receive an additional £120m to test emerging AI systems, build a shared scientific understanding of their capabilities and risks, and help develop technical standards and safeguards.

Russ Shaw CBE, founder of Tech London Advocates and Global Tech Advocates, said the Budget contained encouraging signs of support for the UK's £1.2tn technology sector amid global economic uncertainty and rising costs.

He welcomed measures intended to spread innovation beyond London and south-east England, including the Data Centre Covenant and further investment in sovereign AI capabilities.

"This Budget has made some positive steps, but the Government must now turn its commitments into action and get investment flowing into the companies that will drive the next generation of UK tech success," he added.

Rory Blundell, CEO of AI security company Gravitee, said: "To grasp the opportunities promised by AI, the UK requires widespread adoption. Adoption will only come with trust, and trust requires confidence that technology is under control, is safe to use, and does what we expect. This is what will determine whether the government is able to achieve its goals of keeping Britain safe whilst also encouraging the benefits of AI to reach the whole country."

"The UK has a golden opportunity to take the lead and show that rules don't have to stifle innovation, but that they can create the environment for prosperity."