Energy costs and planning issues hold back the supply of data centres needed to power the UK’s AI growth ambitions, think tank reveals.
In a report out today, the Social Market Foundation – a cross-party think tank – has revealed that the high cost of industrial electricity, planning restrictions, and long delays in grid connection are slamming the brakes on data centre development and thereby risking the UK’s leading position in the AI and digital innovations market. At present, UK is ranked fourth in the world in the level of implementation, innovation and investment in AI, but this cannot be taken for granted, the SMF said.
Data centres are the foundation of AI economies. In the era of ‘AI nationalism’ – the global arms race centred around developing AI capabilities, UK faces fierce competition for investment, and there are signs showing our competitiveness is slipping.
Acknowledging the UK requires “world-class computing and data infrastructure” to seize the opportunities that AI presents, the government’s recently released AI Action Plan argued the UK needs “a long-term plan for the UK’s AI infrastructure needs” if it is to successfully grasp the opportunities that AI presents. The SMF report builds on the Action Plan by setting out policies that can support the plan’s objectives in the short, medium and long term.
Bottlenecks in UK energy supply and planning systems are incentivising data centres to operate outside the UK. For example, to power a hypothetical 100MW data centre, SMF analysis shows that UK’s industrial energy prices mean that it costs 4 times what it takes to power them in the United States (see notes for figure). UK’s electricity supply is also limited compared to peer economies, and vary sharply by region; slow grid connections are unfortunately coinciding with regions where data centres are concentrated (the South East). In addition, European competitors can also supply greener electricity at substantially lower prices.
Just as with energy security, relying on other countries to provide compute power is something to be avoided, SMF said.
The longer-term solution to the cost of industrial electricity is pricing the UK out of the global AI data centre market, is for us to develop an abundance of clean energy. This can be achieved through building fleets of large-scale nuclear reactors and encouraging the development of small modular reactors, the SMF said. Instead of the current approach of a few large reactors being designed and developed in isolation, the UK government will have to facilitate a ‘fleet-based approach’ – building 8-12 reactors in a row, and keeping a steady stream of projects.
SMF’s report also sets out actions to be taken in the meantime, to make data centre development more feasible and cost-effective. Firstly, the government should incentivise data centre development in parts of the UK where there is excess supply of energy by introduce locational pricing. Locational pricing would divide up the UK into zones, and the wholesale price of electricity would be set independently within each zone that reflects supply and demand conditions within the zone. Locational pricing would encourage data centre operators to locate outside of the capacity constrained South East area.
But locational pricing would have to be complemented by reforms to planning rules, which would actually allow users and generators can change location on the basis of the price signals they face. This includes designating ‘AI Growth Zones’ in line with the AI Action Plan’s objectives by using Special Development Orders to bypass regular planning procedures, allowing for rapid development of strategically significant data centre clusters. Additionally, a new ‘data centre planning passport’ should be developed for major proposals outside of AI Growth Zones, to bypass the strangulation of planning laws.
Sam Robinson, Senior Researcher at Social Market Foundation, said:
“Data centres are the critical infrastructure that underpins the digital economy and emerging technologies like AI. Without urgent action to address skyrocketing energy costs and planning delays, the UK risks losing its position as a global leader in tech innovation and adoption. A forward-thinking strategy that makes energy affordable accelerates planning, and boosts green energy investment is essential to securing our future as an AI superpower.”
Notes
- The SMF report will be published at https://www.smf.co.uk/publications/data-centes-and-uk-ai-ambition/ on Monday, 10th February 2025 at 5 AM.
Figure: Estimated annual electricity costs for 100MW data centre, selected countries, 2023:
Source: Department for Energy Security and Net Zero, SMF calculations
- This report is part of the SMF’s AI programme, which is kindly supported by Amazon, OpenAI and Anthropic. The SMF retains full editorial independence.
Contact
- For media enquiries, please contact Communications Manager Richa Kapoor, at richa@smf.co.uk
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