It’s rich in cloud data centers, can the U.K. compete? | Transcript

Speaker 1

Welcome back to Powering Sustainable Ideas, a podcast series from RBC Capital Markets, where we speak with the leaders and companies powering the sustainable future.

In today's episode, you'll hear highlights from a session at RBC's Energy Transition Conference in London from this past June. The conversation examined the future of the UK's power system, from rising electricity demand to the role existing infrastructure could play in supporting growth.

Our guest is Richard Gwilliam, Director of Future at Drax Power Station, the UK's largest power station in North Yorkshire. Originally coal-fired, Drax has been transformed into a biomass-powered facility and is exploring new ways to support the country's evolving energy needs.

Richard joined Alex Wheeler, of RBC's European Utilities Research team, to discuss the opportunities and challenges facing the UK's power sector, and how Drax could help meet the demands of a more electrified future.

Now, let's dive into the conversation.

Alex Wheeler

Perhaps the best place to start is on the evolution of the power system. First of all, it'd be great to get your thoughts on how you see the expected change in UK electricity demand after what's been quite a stable period. What you see as the key drivers and what this means for the system as a whole.

Richard Gwilliam

You're right to sort of flag this change that we've gone through, because for the last two decades we haven't really seen a huge amount of growth in electricity demand, it's been really stable, or at times has fallen. I think across the country we've seen, you know, relatively large levels of deindustrialization, increased in energy efficiency, and then you know electrical appliances have also become more efficient, and if I think back to my time in the sector, I've been with Drax now for coming up eight years, but I think back to 2010 I worked at National Grid, and at that point, you know, my job was to look at how we rewire the country on the anticipation that we were going to electrify the economy. It feels like that's something we've been talking about for a very long time, we're almost there, I think. So, heat pumps having a modest impact, EVs having increasingly significant impact on demand, and we're seeing big increases in demand driven by data centers. The UK has a large proliferation of data centers driven by our, you know, mature telecom sector and our financial services industry, in particular. So we know that the sort of concentration on the M25 is driving up demand, but these three things are all contributing to what does appear to finally be the electrification of the economy, this sort of much heralded hockey stick in growth, and I think if you look back over the last three quarters, we've started to see that demand tick up. How we respond to that challenge in the UK at the moment is that we have focused on bringing more renewables into the mix, policy interventions over the last five years has driven growth in that area, in particular. Now that's great in terms of decarbonising the economy, decarbonising the grid, but it does mean that our system is more vulnerable to weather dependent events, and we're finding there is more value and real interest in how do you power the country when the wind isn't blowing and the sun isn't shining, so what we're seeing in response to this sort of, you know, increased penetration of renewables is a greater demand on flexibility services. The mix is changing quite profoundly, and the value in the system is at a different place than it was historically.

Alex Wheeler

How should we think about power prices and the evolution there, when we have, I guess, the demand drives on one side, but also you have lower marginal cost technologies, energy efficiency, and an increase in behind-the-meter generation.

Richard Gwilliam

If you can harness power from free sources, the consequence should be that the power costs go down. Now, obviously, we know that to get developers to invest in those sorts of technologies, you need to put the right incentives in place, so you end up with very large policy costs on the bill, which contributes to a higher level of cost overall, but I would expect over time, with this sort of increased penetration of renewables, that the wholesale cost of power should go down, apart from this little bit at the end where you have to have some flexibility to respond to weather-dependent events, and I think what we'll see, while the sort of the trend might go down, the volatility evidently will increase. I mean, at the moment we're having increasing numbers of, you know, negative pricing events, or very low pricing events, but that corresponds with gas assets brought on the system at short notice that are able to command quite high price because they're used in frequently responding to those events, so we see larger spikes in the cost of power overall.

Alex Wheeler

There's been a lot of talk about potential market reforms in the UK, given the sort of the broader global political environment, which brings me on to the question around whether the design of the UK power market is appropriately aligned to that reforming system, or whether you think actually there are some structural changes that need to take place.

Richard Gwilliam

How do we deal with this in global political level? I don't think we are, to be honest, at the moment. And I think you know politicians will talk about decoupling power from the gas price, that seems to be a buzzword that everyone seems to think will solve some of the challenges, but I don't think we're seeing a substantive policy that is driving that change, so I think there's a lot of head scratching goes on as to how we can evolve the sort of policy backdrop and the investment backdrop against the evolution in the energy system generally. If you look at the events that we saw last year in Spain and Portugal, and the blackouts, in part, you have plants that drop off the system, which is evident. If plants aren't available, you can't have power, but you need to be able to push power around the network as well. So, not only do you need to produce megawatts and get them on the system, you need to find a way of moving that power from places of generation to places of demand. So, you're right, short circuit frequency response, inertia, voltage control are three services that the National Energy Systems Operator are looking at tendering at the moment. To date they have done procured services over a relatively short period. Last year they launched a tender for a 10-year period. And that's driven again by the change in the mix. So short circuit, frequency response, voltage control, inertia were all services that were provided when you had large spinning plant on the network, so Drax is a really good example of that. We have effectively almost the largest power station in the UK, and it has six power stations within it. Each is a very large turbine that rotates. We've seen the closure of coal, we've obviously transitioned to run on biomass, but if we’ve seen the closure of coal and these large plants have gone off the system, those services, which effectively were there for free, are having to be procured separately. You can get synthetic inertia-free batteries, but these other services are still required. So, we're seeing, you know, companies build fly wheels, for example, and sit them on the network, just a spinning plant to keep the energy systems moving. So the change has brought about a different market that, you know, as an industry, we've had to figure out how we respond to.

Alex Wheeler

On the demand point how supportive do you think the UK government is to the evolution of that system? What have they done so far in supporting that sort of AI data center deployment?

Richard Gwilliam

There's more demand for data centers in the grid queue at the moment than there is peak demand capacity in the UK. It's evident that not all of that will be built, but it's also evident that lots of people see lots of value in that market. Now, in the UK, at the moment, as I think we have the second highest number of data centers in Europe, just behind Germany, then the proliferation of those around the M25 corridor, because you want data centers that are close to where the demand is. The AI story is really interested in bringing a different dynamic, and it could fundamentally change the sort of geography of data centers. AI data centers can primarily do two things: one, machine learning - they are really high energy-intense, but can be located anywhere, because they're not sensitive to latency, and two is inference, so us asking questions of AI of machines that have learned a certain thing, and it's that inference AI we're forecasting the largest growth. There's an argument I think to suggest that data security can, will become as important as energy security in the next, in the next decade, so that then brings two things: one, you need to look at data residency, where the data is processed, if it's sensitive, do you really want it to go abroad, and then data sovereignty, so those things absolutely must be within the remit of the UK. In recognizing this trend and in not wanting to be left behind by the sector, the government has set out an AI strategy. It set out a delivery plan, and the sort of centerpiece of that was a series of AI growth zones. That’s sort of really interesting, because I was involved in the whole journey as to when these things were conceived and to what they would look like, and I think at the time it was an idea that seemed to be something the UK should do, but without any definition as to what being an AI growth zone is. I think that persists to some extent today, but the government have now announced six, I think the initial one was in Oxfordshire, at the old AEA site, where they have large amounts of electrical imports. There's a couple in Wales, there's one in the North East, Scotland, and these are the sort of the spatial areas that government sees growth in AI data centers for. And having said that, however, the number of sort of AI data centers that are being constructed in the UK at the moment is not huge, and that's partly driven by the high energy prices and some uncertainty on how you'll manage the system during the energy transition, so I think government are doing a lot. They're certainly grappling with the issue. I speak to DESNZ, department for energy security and net zero, a lot. They set up their own both AI teams and AI data sovereignty teams, so you can see this is an issue they’re getting to grips with.

Alex Wheeler

I want to talk a little bit about existing infrastructure, and specifically how, how important existing infrastructure will be to service the needs of the grid going forward.

Richard Gwilliam

We have an electricity system, you know, born in the 30s, modified significantly in the 70s, 80s, but fundamentally, the bones of the electricity system we have were built and developed last century, and they were for a different distribution of power that we're seeing today. But if a government was to step in and rewrite how the country should be wired, it'll be a hugely expensive thing to do. So, we are thinking about what we have and how we evolve it to deal with the system differently. From my own perspective at Drax, my job is the future of Drax Power Station in the long term, so we have a contracted position to supply power through government, obviously, but to the grid between 2027 and 2031, and my role is to look at how we can enhance the value of that asset during that period, and then what is its role beyond, and, as I said, a larger power station in the country. We have an estate that's 1,250 acres, we have four gigawatts of transmission entry capacity, we have infrastructure that was constructed and operated differently then than it does now. And it's evident that if we are to electrify the economy and we are to keep pace and attract the sort of AI data centers that we talked about, we need to get more out of existing assets than we do already, rather than just start from scratch. So the example that I present with Drax is that the contracted position for the four years I've just described will see us provide, I don't know, it contracts about a third of the overall generation capacity, so you think we've got two thirds of power that's not being used. You know we've got a unique site at Drax, undoubtedly by scale and opportunity, but this is characteristic of a lot of other legacy plants in the network, and I think there's real value to be gained from thinking differently about how we use existing assets rather than starting from scratch.

Alex Wheeler

And one of those uses, I guess, which is a little bit more public for Drax, is the ongoing negotiations around potentially having a data center site at Drax Power Station.

Richard Gwilliam

When I pitched this back to our board last year, was there are sort of three growth areas that we could look at for the site. One, we could play a bigger role in system services, because that evidently is going to become more and more important. Two, we need to take a look at how we repurpose the strategic assets that we have, primarily the transmission entry capacity. So, you know, getting onto the grid queue is not easy at the moment. We have a power station that produces 2.6 gigawatts of power, but we have entry capacity rights for four gigawatts, so what else could we do on the site to do that, and then the third area, to get to your point was, is the scope to look at a sort of captive demand market on the estate. We have two 75 MBA transformers that import power from the grid and can be redistributed to the data center. In theory, that's available today, right? So, if you can go and build a small-scale data center, so 100 megawatts at Drax, there's infrastructure that'll allow you to power it on the site, so that's phase one. Phase two looks at how you can use the existing station to power further data center capacity, and I mentioned previously about our contracted position with government between ‘27 and ’31. Within the provision of that contract, we can carve 500 megawatts out for data center projects, so there's scope for us to use the existing generation capacity in line with our contracted position to build data growth, and then when our contracted position with government ends in 2031 in theory, you could have unfettered access to the 2.6 gigawatts of generation capacity at Drax for a data center, so this approach sort of incremental growth getting up to gigawatt scale, you know, near, you know, just into the next decade, it lines up really well with how the market thinks about deploying data center capacity in the UK. So, it's a really exciting opportunity. I think it can stimulate large amounts of, you know, economic growth and prosperity in North Yorkshire, as well as help sustain and get better use out of the existing asset.

Alex Wheeler

We've obviously heard a lot of media around longer connection queues, connection reforms. It doesn't sound like you're too optimistic on the opportunity for that to resolve in the short term.

Richard Gwilliam

Yeah, I mean, if we are electrifying the economy, if the value of economic growth is driven by access to electrons, not being able to get power off the system is a real constraint and a problem. The market for data centers, in particular, is evolving at such a significant rate, if you are wholly dependent on building presence in that by joining a grid queue, the opportunities will just go elsewhere. So, we must find a better way of using existing assets more effectively.

Alex Wheeler

Drax, as a business, has been building a footprint across a range of storage assets and flex-gen assets, as you noted earlier, and I'd be interested in your views on how you know long-duration assets, such as hydro pump storage, fit in with peakers, batteries, and the other assets within the flex gen.

Richard Gwilliam

Drax’s pivot into that flex-gen space is driven by an understanding that those assets will have enhanced value because the system will need them to keep the lights on. Our grid system in the UK globally is probably in the sort of top five. I think we got Singapore, Netherlands, and a few others that are slightly ahead of us in terms of reliability. Over time, having reliable access to power has helped us build economic growth for the nation, really, and if we have a system which is dependent on the weather, you need some form of backup, and you'll get more resilience. So, yeah, we've looked at both long duration and shorter duration storage of batteries through to Cruachan power station, the pumped hydro asset we have in Scotland, and it continues to be a really interesting growth opportunity for us.

Alex Wheeler

Perfect. Okay, thank you very much, Richard. Appreciate your time.

Speaker 1

Thanks for listening to Powering Sustainable Ideas, brought to you by RBC Capital Markets. Please remember to subscribe for more great content and to be alerted to future episodes. This podcast was recorded on June 25, 2026. If you would like to learn more or continue the conversation, please visit us at rbccm.com/poweringsustainableideas.