How investors are managing risk in the new wave of European data centre projects

Data centres have emerged as a leading infrastructure investment category across the European market, with €176 billion in cumulative investments expected across Europe between 2026 and 2031, according to the European Data Centre Association. Beyond the established markets of the UK and Germany, which remain central to investor strategies, increasing volumes of capital are targeting Southern Europe, particularly Spain, Portugal and Italy, and the Nordic markets, where strong renewables pipelines, strategic locations and favourable climatic conditions are attracting interest.

Behind these headline numbers, however, sits a more complicated reality. Regulatory risk, evolving environmental, social and governance (ESG) pressures, grid connection constraints and power procurement challenges are slowing delivery, forcing investors to rethink how they structure and price data centre projects.

Grid connection constraints

Grid capacity is rapidly becoming the defining constraint for many data centre projects.

In Germany, section 17 of the Energy Industry Act requires grid operators to facilitate connection to their grid on a reasonable, non-discriminatory and transparent basis. In practice, this has followed a  “first come, first served” principle. That approach is now under severe strain as excess grid reservation and connection requests far exceed available capacity. 

For data centre investors and developers, the implications are stark. Only around 10-15% of grid applications for data centres will be accepted. The familiar assumption that a well‑located project will eventually secure capacity no longer holds.

Projects that fail to secure realistic and timely grid connections risk becoming stranded long before construction begins. This is reshaping decision-making across the industry. Investors and developers are increasingly embedding grid strategy into the earliest stages of the project lifecycle, aligning site selection, technical design and financing with a realistic assessment of what the network can deliver. Partnerships with power suppliers are becoming more strategic, with utilities now treated as long-term counterparties from the investment phase onwards, not just as connection providers.

This shift in approach is illustrated by Germany's planned Reifegradverfahren, a maturity-based allocation process for large-scale projects. Under this proposed framework, the timing of an application will matter less than project credibility. Grid access will be prioritised for projects that demonstrate a high likelihood of completion, assessed against defined criteria such as land already secured, a robust technical concept and credible financing.

For investors, this means that early-stage preparation must be more rigorous. In a market defined by constrained capacity, securing grid connection is a fundamental driver of project value.   

EU regulatory and sustainability pressures

Across the EU, existing and forthcoming decarbonisation and sustainability obligations must be factored into project planning. Data centre-specific reporting and waste heat-related obligations were introduced under the EU Energy Efficiency Directive in 2023. The European Commission has announced plans for an EU sustainability label and is working on legislative proposals for harmonised sustainability-related minimum performance standards. This would create a level playing field with member states like Germany, which has already introduced equivalent minimum performance standards at national level.

For projects using gas-powered generation as a short-term solution to secure power supply despite grid constraints, environmental regulations and carbon pricing, including under the EU Emissions Trading System regime, can materially influence cost, location and timing. Factoring these into project planning from the outset is sound risk-management practice.

Regulatory balance in the UK

Policymakers in the UK are also grappling with how to develop an oversight framework for a sector that is both economically significant and extremely energy intensive, while ensuring that it remains attractive to investors.

There is a risk of over-regulation, however: it is important to find a balance between regulatory burdens and the economic interests of investors.

This balance will be central to the next phase of data centre growth in the UK. Excessive regulatory burdens risk dampening investor appetite in a capital‑intensive sector; too little oversight risks compounding grid stress and drawing public and political backlash. Investors would be wise to start preparing for increased regulatory oversight of the sector. 

Regulation in Germany

There are no outright prohibitions on data centre development in Germany. The standard planning, permitting and environmental regimes do apply and can create material constraints if they are not addressed from the outset.

Data centre projects must comply with general land‑use rules as well as construction and operational consent processes. Noise and air‑pollution limits can shape both site selection and technical design, influencing everything from building layout to cooling technologies. Developers that leave these issues until late in the process risk expensive and time-consuming project redesigns. 

Power procurement

The scale and continuity of data centre electricity demand has made power procurement a priority at bord level.

Across Europe, power purchase agreements (PPAs) have become the standard starting point for data centre power strategies. Long‑term PPAs can stabilise electricity costs, reduce exposure to wholesale price volatility and align the asset with renewable energy sources. This strengthens ESG propositions and credit narratives.

Alongside PPAs, battery energy storage systems (BESS) are gaining traction. They give data centre operators greater flexibility over how and when they draw power from the grid, which is an important capability for operations that cannot tolerate outages or volatility. Used well, storage can help optimise contracted capacity and smooth consumption, reinforcing both operational and financial resilience.

Synergies with renewables

A recurring theme in investor discussions is the growing synergy between data centres and renewable energy projects, and how shared teams and processes can drive real efficiency gains and operational consistency.

On the development side, both asset classes depend on early‑stage capabilities such as site identification, land control, grid strategy and stakeholder engagement. Both also require careful handling of planning and permitting processes. 

On the power side, structural links, whether through PPAs or co‑located projects, can connect supply and demand in ways that benefit both asset classes. For investors building European platforms, aligning data centre portfolios with renewable generation is increasingly central to their investment strategy.

Beyond grid and power, less obvious risks are increasingly coming to the fore in data centre investment decisions.

Chip lifecycles and shifts in computing architecture can affect power density, cooling requirements and internal layouts. Underestimating the frequency and scale of hardware upgrades or replacements can lead to insufficient investment in flexibility and overly optimistic assumptions around capital expenditure cycles. This can prove costly as technology evolves at pace.

As a relatively new asset class , data centres do not always sit neatly within existing insurance and financing frameworks. This can limit insurance cover levels or push up premiums, prompting lenders to seek more conservative structures or tighter covenants. This can result in a funding environment that can still feel bespoke, with investors needing to spend time educating capital providers and negotiating structuring protections.

Data centres are increasingly designated as critical infrastructure, making them a high‑value target for sophisticated threat actors. Investors need to look beyond physical resilience and assess the sophistication and integrity of cyber security protections across the entire operation. This includes supply chain risk: the cyber security of key suppliers and service providers can be as important as that of the data centre operator itself. Weaknesses in this ecosystem can create both operational disruption and reputational exposure.

Osborne Clarke comment

Data centres are fast becoming a core component of Europe’s infrastructure landscape. 

Constrained grid capacity, increasing regulatory scrutiny and fast‑evolving technology now means that traditional real estate‑led or purely digital approaches are no longer sufficient to deliver viable, long-term data centre operations. The strategies that will prove most effective are those that integrate grid, power and ESG from the outset of project planning.

Investors who engage early with grid operators and power suppliers, capitalise on synergies with renewable projects and adopt a proactive approach to risk management will be best placed to secure capacity and capital on attractive terms. 

This Insight draws on discussions at a recent Osborne Clarke breakfast event in Berlin, where market participants discussed how they are navigating the next wave of European data centre development. 

Osborne Clarke advises clients across the full lifecycle of data centre projects in the UK, Germany and across Europe from site selection and grid strategy through to power procurement, planning and financing. To find out more about how we can help, visit our data centres page.