In the rapidly evolving data centre industry, the surge in demand is unprecedented. Driven by large cloud service providers (known as "hyperscalers"), the development of AI technologies and high-performance computing, planned deployment in the UK is expected to reach 982MW over the next five years with development costs currently estimated at £9-10 billion. However, such a rapid expansion has exposed limitations in existing public resources, processes and policies and presents investors, developers, operators and their respective advisers with new and complex legal and strategic challenges.

Demand and investment opportunities

The growing demand and significant investment potential in the data centre sector highlight a critical period of growth and opportunity. Whilst major hyperscalers were previously the main source of capital investing into the sector, the projected growth and return potential continues to attract private institutional capital and at an increasingly accelerating rate. In light of the capital-intensive nature of the data centre market (which largely remains in its infancy), this interest shows no signs of waning, making now an optimal time for stakeholders to consider their strategic positions.

Addressing the "three Ps"

Power, planning and people. The uncertainty surrounding connection costs and timelines, inconsistent application of planning policy to data centre developments and a shortfall in available technical personnel, remain a persistent headache for data centre operators. Despite recent government consultation on planning and power connection reform, the general consensus from industry leaders is that this has come too late and is significantly inhibiting operators' abilities to service the strong demand from their customers. Positively, some commentators have indicated that the requirements of new AI data centres (in particular, AI training sites) may be location-agnostic due to lesser latency concerns, allowing operators to explore excess power in secondary and emerging markets, although this is yet to be tested. Operators are increasingly looking to invest in organic growth, targeting outreach programmes with technical schools and colleges, as well as in-house apprenticeship programmes to foster a sustainable future workforce. From a legal standpoint, ensuring projects are structured in a way which is complementary to and compliant with a changing regulatory landscape is essential to support more predictable outcomes and create additional value for investors.

Future-proofing infrastructure

Traditionally, developers and operators could adopt a "build it and they will come" mentality, developing speculatively in line with a conventional model. However, the shift towards AI-dedicated facilities in addition to a greater focus on sustainability is challenging operators to develop "build to suit" or hybrid facilities which can meet existing requirements and service significantly higher future workloads, all whilst striving towards greener ESG targets. The increased rack density and physical weight of equipment, for example, and the implications on cooling infrastructure and structural design, are forcing operators to engage more closely with customers and accommodate bespoke design proposals in favour of more standardised architecture. It is estimated that the sector will undergo a period of three to five years before reaching an inflection point, after which operators will need to focus on building data centres for the future, rather than simply answering to their customers' immediate requirements or retrofitting older facilities.

Collaborative solutions

Industry leaders have called for effective collaboration (rather than additional regulation or increased competition) between operators, their supply chain and customers, as well as a need to leverage technical research and development, to solve the challenges currently facing the data centre market. Uncertainty regarding power and planning will necessitate a closer working relationship with operators' supply chains and their customers, as well as clear underlying legal agreements to protect these interests and effectively manage key risks. The importance of leveraging the technology modern data centres seek to underpin also cannot be understated, as operators seek to harness accurate real-time data to help streamline the construction and operation phases and minimise wastage.

As legal advisers specialising in real estate, planning and technology sectors, Dentons is experienced in navigating the complexities of data centre development. We assist stakeholders in safeguarding their investments and positioning them for future success and work closely with operators to understand their priorities at each stage of the asset lifecycle – from acquisition, financing and development to contracting with customers. If you are involved in data centre development or are seeking insights into the legal aspects affecting your business within the data centre sector, please reach out to one of our team to find out more.