The Energy Transition | Ofgem proposes commitment fee for GB data centres

This week we look at Ofgem's consultation on new measures to address non-viable data centre projects in the demand connection queue, and its revised special licence conditions for "Window 1" long-duration electricity storage projects. 

Ofgem proposes commitment fee and queue management milestones for data centres 

Ofgem is consulting on a package of new measures to manage the number of non-viable projects currently in the demand connections queue, "initially focusing on data centres". Data centres account for approximately 73 gigawatts (GW) of the total demand connections queue. 

The National Energy System Operator (NESO) has noted that, between May 2024 and August 2025, at least 9 GW of data centres in the transmission queue had modified their connection request from a "battery" to a "data centre" technology, and some stakeholders have suggested this pattern will continue to apply in future application windows. The consultation follows a NESO demand information request notification earlier this year.

Commitment fee

The first proposal would introduce a new data centre commitment fee (the "DCC Fee"), which would apply to both new and existing projects at both transmission and distribution level.  Ofgem proposes it would be payable only by those projects above 40 megawatts (MW). 

The DCC Fee would be payable on acceptance of a "Gate 2" grid connection offer. It would be returned if the project proceeds as planned, but forfeited if the project terminates (e.g., exits the queue), or fails to progress in accordance with requirements. The sum would be 100% secured between Gate 2 offer acceptance and energisation. Hybrid projects with both generation and data centre components may be subject simultaneously to a generation project commitment fee (for the generation component) and a DCC Fee (for the data centre component). 

Ofgem hopes the DCC Fee will encourage self-termination by projects that are no longer viable while discouraging unviable projects from entering the queue in the first place. 

Ofgem is consulting on a DCC Fee range of £237,500 to £712,500 per MW, representing around 2.5% to 7.5% of typical project costs.

Milestone proposal

A second proposal would introduce additional queue management milestones specific to data centre projects to ensure they make timely progress towards becoming operational; and to the extent milestones are not met, projects may be ejected from the queue. The consultation states Ofgem's aim that these operate not as new entry requirements, but as evidence-backed milestones reflecting the typical development and financing of data centre projects. Ofgem is consulting on the possibility of different pathways for self-operated projects and those for sale or lease, recognising the different business models will mean that progress will be demonstrated in different ways. 

There are three proposed milestones. First, it proposes a pathway selection and non-binding compute offtaker evidence milestone, referred to by Ofgem as M0.5.Dc, which could take the form of heads of terms or a memorandum of understanding. Second, a long lead-time procurement evidence milestone, or M2.Dc, would require a project to demonstrate a "genuine and material commitment to procure electrical equipment needed to connect and operate the project". Third, a milestone for financial and technical capability evidence, or M6.Dc, which could be demonstrated through either having an investment grade credit rating or committed financial support. 

The consultation closes on 16 September.

Ofgem revises special licence conditions for long-duration electricity storage projects 

Ofgem has published a further call for input on its "minded-to" positions for the revised special licence conditions that would apply to "Window 1" projects under the long-duration electricity storage (LDES) cap and floor programme. Ofgem provisionally selected 16 projects to receive support under the programme, spanning pumped storage hydro, compressed air energy storage, lithium-ion batteries and vanadium redox flow batteries. 

The call follows Ofgem's draft of the special licence conditions issued in March. Having considered stakeholder feedback, Ofgem has updated the draft and is now seeking views on its minded-to positions before making final decisions, which are expected this autumn.

The call for input sets out several areas where Ofgem's position has evolved following the concerns and feedback received in the March consultation and on which further views are now invited. These include floor methodology, backstop delay charges, market participation, a delivery plan, optimiser fee controls, operating as an LDES, and system event reporting.

Floor methodology

Ofgem is minded to retain both the administrative and actual cost of debt (ACOD) floor approaches, but has revised the drafting to clarify the distinction between the circumstances in which each approach applies. The revisions also strengthen the ACOD support tracking and repayment framework, including its interaction with settlement and distribution restrictions.

Backstop delay charges

Having considered stakeholder feedback, Ofgem has retained the backstop date and associated delay consequences framework, noting that these are needed to encourage timely delivery and protect consumers, while making "targeted changes" to improve proportionality and financeability. Ofgem is minded to replace the previous "cliff edge" approach by introducing a progressive backstop delay factor, starting at 0.05 for the first three months of delay and increasing by 0.05 for each additional three-month period, up to a maximum of 1.0.

Market participation

In response to stakeholder concern, Ofgem would replace the previously proposed "revenue maximisation" duty with a market participation and anti-gaming framework. This would focus on reasonable market participation and consumer protection rather than an absolute obligation to maximise revenue.

Delivery Plan

Ofgem has introduced a new delivery plan framework requiring authority-approved milestones, progress reporting and risk notification, intended to provide earlier intervention opportunities and a more graduated approach before revocation is considered.

Optimiser fee controls

In response to stakeholder feedback, Ofgem has amended the draft special licence conditions to provide greater clarity regarding the treatment of third-party, related-party and in-house optimiser arrangements, and has clarified the reporting, evidential and record-keeping requirements applicable to different optimisation models. Ofgem is minded to introduce differentiated fee caps, distinguishing between third-party optimiser arrangements and those involving associated or related undertakings.

Operating as LDES

Ofgem has strengthened the expectation that supported facilities must continue to operate consistently with the long-duration capability on which they were assessed and approved, and must not, as a "persistent or routine operating practice", dispatch facilities in a manner materially inconsistent with that capability. In doing so, Ofgem has stopped short of prescriptive dispatch requirements. It has reiterated that operational responsibility remains with each licensee.

System event reporting

Ofgem has introduced targeted reporting and record-keeping requirements relating to defined system stress events, to improve transparency of facility availability and operation during those events, without creating new dispatch-control obligations.

Responses from stakeholders should be submitted by 18 August. 

This article was written with the assistance of Osborne Clarke trainee solicitors Maggie Hudson and Elise Hill.