UK Budget 2026: Data Centres and Power Generation

The Chancellor, John Healey, promised to tackle “the big challenges in energy” with a 10 Year Plan. The Government’s headline energy measures are, however, largely aimed at consumers: a further £2.6 billion Household Energy Payment, the extension of the VAT cut on electricity until July 2027, and a commitment to control the policy costs placed on bills. Most of the proposed structural reform of the electricity market is deferred to the 10 Year Plan and to planned consultations.

Within the detail, though, there is a good deal of significance for data centre developers, generators and their investors: a new Data Centre Covenant linked to faster grid connections, the extension of the Electricity Generator Levy, the removal of Carbon Price Support, a consultation on wholesale Contracts for Difference and a continued commitment to new nuclear.

At a glance

Data centres: a covenant in exchange for faster power

The Government has published a new Data Centre Covenant establishing the tests that “strategic” data centres must meet to qualify for additional government action (lower bills, investment in local communities, the highest environmental standards, job creation, and strengthening Britain’s security, including secure access to compute for public services). In return, the Government promises to accelerate time to power for strategic data centres by:

• Reserving and reallocating connections: using the new Planning and Infrastructure Act powers to prioritise and reserve future capacity, and to reallocate capacity freed up when projects leave the queue.
• Identifying additional capacity: working with NESO and the network companies to find locations with capacity before 2030, and possibly use the Planning and Infrastructure Act’s powers to access it.
• Accelerating connections before 2030: using those powers to help transfer pre-2030 data centre connection contracts for earlier connection.
• Enabling temporary on-site power: allowing on-site generation until a grid connection is secured. This is only for exceptionally strategic projects where the measures above fail, and subject to conditions such as energy security.

The Government is also publishing a consultation response on strategic demand connections. It confirms that Planning and Infrastructure Act powers will be used to prioritise grid connections for strategically important projects.

“Strategic” status looks set to become a gateway to faster access to power, but the obligations that must be met to achieve this status appear onerous.

Electricity Generator Levy extended

As previously announced, the Electricity Generator Levy rate rose from 45% to 55% from 1 July 2026, and the levy will be extended beyond its original end date of 31 March 2028. It will now remain in place for the lifetime of the longest wholesale Contract for Difference. The exemptions for new investment and for CfDs will remain, and CfDs will include wholesale CfDs. A consultation on the future design of the levy will follow next year, with changes made in a future Finance Bill.

Owners of existing generation assets outside the CfD regime should factor the extended levy into long-term valuations and financing models. The scope of the new investment exemption will be important for repowering and life-extension projects.

Electricity market reform

A consultation on wholesale Contracts for Difference has been published, advancing the Government’s plan to delink electricity prices from volatile international gas prices. The Government also intends to consult on Market Arrangements for Gas, and further reforms to the CfD scheme will be delivered before Allocation Round 9 opens.

Networks

Great British Grid will work alongside existing network operators to increase competition and support delivery of grid upgrades and reforms. The Government also plans to introduce competition in onshore electricity transmission shortly.

Nuclear

The Government has committed to deliver the findings of the Fingleton Nuclear Regulatory Review in full, described as the most significant reset of the UK’s nuclear regulatory system in over 20 years. Many recommendations have already been implemented or will be delivered through the Nuclear Regulation Bill early next year, with all reforms due by the end of 2027. This should make new civil nuclear quicker and cheaper to deploy.

Tax points for project sponsors

• The minimum expenditure threshold for HMRC’s Advance Tax Certainty Service will fall from £1 billion to £300 million from 4 November 2026, bringing many more generation and data centre projects within scope. The service gives businesses and public bodies investing in major UK projects a formal, binding clearance from HMRC on how key UK taxes will apply.
• The Government is also considering changes to guidance on the tax treatment of predevelopment costs and wider challenges for infrastructure investment under the capital allowances regime, both of which are relevant to developers incurring significant early-stage costs.

What to watch

For further information on any of the measures in this update, please contact Ed Moberly.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.