The data centre boom: is the grid connection more important than the property itself?

Assess the capacity that the project can actually use

Proximity to the electricity grid says little about actual connection capacity. Supervision by the Swedish Energy Markets Inspectorate (Ei) confirms that constraints in the upstream network can prevent new connections altogether. A nearby substation is not, in itself, evidence that a data centre’s power requirements can be met.

The investment case should draw a clear distinction between documented commitments and assumptions about future capacity. Where the connection covers only the first server hall, the remaining development rights should be valued with the expansion risk fully reflected. Otherwise, the buyer may end up paying for development potential whose most important prerequisite is still not in place.

The connection obligation does not eliminate timing risk

Under the Swedish Electricity Act, grid operators are, as a starting point, obliged to connect customers on objective, non-discriminatory and reasonable terms. Exceptions apply where there is no available capacity and the shortage cannot be remedied in a socio-economically justified manner, or where other special grounds exist. Connection must take place within a reasonable period and, in any event, within two years, although this deadline may be extended where the scale or technical complexity of the connection requires it, or where other special grounds apply. The two-year rule is therefore not an unconditional guarantee.

For any data centre project, three questions must be kept separate: the regulatory obligation to connect, the grid operator’s contractual commitment, and the go-live date assumed in the business case. These will not necessarily align.

Due diligence should therefore establish what capacity and timeline the grid operator has actually committed to, what conditions or reservations apply, and what remedies are available if there is a delay. A preliminary indication from the grid operator should not be treated as more than its terms allow.

Conditional connection agreements warrant particular scrutiny, as they may restrict the available power offtake. Such agreements are classified as a non-market-based measure and may only be used where the exceptions in Article 13.3 of the EU Electricity Market Regulation apply. Ei has stressed that regulatory approval of the methodology for designing the contract terms does not, by itself, authorise a grid operator to impose conditional agreements. For the investor, the further question is whether the resulting restrictions are compatible with the data centre’s operational requirements and customer commitments.

Ensure the rights form part of the transaction

Due diligence must address both the substance of the connection arrangements and the identity of the rights holder. A connection agreement held by a group entity other than the acquisition target can leave a material gap in the deal.

In an asset deal, the buyer should verify whether grid agreements need to be assigned or novated, and what consents are required. In a share deal, the contracting party remains unchanged if the target company holds the agreement, but change-of-control provisions and security requirements should still be reviewed.

The review should also cover outstanding fees, milestone deadlines and dependencies on grid reinforcement works. The objective is to confirm how the buyer will secure the electricity supply on which the valuation depends.

Reflect the uncertainty in the deal terms

Where the grid connection is a decisive factor, the associated uncertainty should be reflected in the transaction terms. Options include conditions precedent, phased completions or price adjustment mechanisms. The appropriate solution will depend on the specific deal structure.

In a direct property acquisition, the Swedish Land Code requires any conditions relating to completion or continuation of the sale to be set out in the conveyance document. Such conditions may not extend beyond two years from the date the document was executed; a longer period renders the sale void. The two-year limit does not, however, apply to conditions relating to payment of the purchase price or conditions required by statute. A protracted grid connection process may therefore necessitate an alternative transaction structure.

In lease and project agreements, the electricity supply required for access, commissioning and the commencement of payment obligations should be clearly specified. The property owner’s commitments to the operator must be measured against those of the grid operator. Any mismatch leaves the property owner bearing the risk itself.

The grid connection can make or break the deal – but it is not the only factor

Even where the grid connection is fully resolved, the development must comply with applicable planning and building regulations. The design of backup power systems may also trigger environmental permit requirements. These issues should be assessed alongside the connection.

In our view, the grid connection can be the determining factor where a project’s value depends on a defined capacity being available by a specific date. The property’s commercial potential is realised only once the conditions for operation are sufficiently secured.

Before committing to the investment, four key questions should be answered: What capacity is covered by binding commitments? When will it become available? What outstanding conditions remain? And who bears the loss if the underlying assumptions prove incorrect?