Microsoft swerves multibillion-dollar Nscale data centre expansion

Microsoft has opted against expanding a major data centre deal with British AI dealing Nscale that could have been worth tens of billions of dollars, in fresh sign of the challenges facing the industry’s vast infrastructure spending plans.

The US tech giant decided not to take up an option to more than double the computing capacity it rents from the Nvidia-backed company at a site in Texas.

However, the decision was made several months ago, a source familiar with the matter said, before its September stock market filing. They stressed that its existing contracts with Microsoft remained unaffected.

The London-headquartered firm, which counts former deputy prime minister Nick Clegg and former Meta executive Sheryl Sandberg among its board members, has become one of Britain’s most valuable AI start-ups by securing multibillion-dollar contracts to supply the computing power needed to run artificial intelligence.

City AM understands that the data centre firm’s existing Ward Country contract with Microsoft remains unaffected.

The decision follows Microsoft’s withdrawal last month from a separate Nscale data centre project in Essex, although the British firm insisted its wider relationship with the US tech giant remained strong.

Under an agreement struck in October last year, Microsoft committed to renting around 240 megawatts of computing capacity at Nscale’s Ward County development in Texas, with the option to take significantly more.

Another Microsoft setback

That additional capacity, equivalent to roughly 500 megawatts, could have generated tens of billions of dollars in future revenue for Nscale.

Microsoft has decided against taking up the option. The existing agreement remains intact, while Nscale is understood to be in discussions with other potential customers for the available capacity.

The decision does not affect its reported $103bn (£76.5bn) backlog of contracted future business. Although it does remove a potentially lucrative source of additional revenue.

The company operates a data centre on land leased from cryptocurrency miner Ionic Digital in Ward County, where it has built the infrastructure needed to supply Microsoft.

It is also developing a neighbouring site on land it owns, where robotics company Figure AI has signed up as a customer.

“Our owned site in Ward County is already being built to serve Figure AI and other AI natives and we’re already in discussions with several major customers for the rest of that capacity,” Nscale said.

The two developments form part of Nscale’s wider plans for up to 1.2 gigawatts of computing capacity in Ward County.

The company added that its relationship with Microsoft remained in good standing, with work continuing on contracted projects in Norway, Portugal and Texas.

AI spending hits bottleneck

It follows Microsoft’s withdrawal last month from Nscale’s flagship UK data centre project in Loughton, Essex, which had been championed by the government as a cornerstone of Britain’s AI ambitions.

The £2bn development was originally expected to open next year but has been hit by delays securing enough electricity to power the site.

UK Power Networks has reportedly indicated that sufficient grid capacity may not be available until the early to mid-2030s, leaving Nscale exploring alternative power sources.

Microsoft, which had been expected to become the site’s main customer, pulled out of the arrangement but maintained that it remained committed to its wider partnership with Nscale.

The decisions come as investors increasingly scrutinise the enormous sums being committed to AI infrastructure, particularly by companies borrowing heavily to build data centres before they become operational.

Nscale is targeting a valuation of as much as $35bn in its planned New York listing, over double the roughly $14.6bn valuation it secured in a funding round earlier this year.

Nscale secures deal with Anthropic

The company, founded by former cryptocurrency miner Josh Payne, reported a $1bn net loss on revenue of just $141m in the first half of 2026, with much of the loss attributed to non-cash charges.

Its business model relies on securing long-term contracts with major tech giants before raising the vast sums needed to build and equip data centres.

That makes commitments from customers like Microsoft and Anthropic particularly important. Investors are increasingly scrutinising whether the enormous sums being poured into AI infrastructure will generate sufficient returns.

Nscale has already secured a deal worth around $45bn to supply Anthropic with computing power from its West Virginia campus and is reportedly negotiating a second agreement of similar size.

However, that project has also faced construction delays and local opposition, adding to the challenges facing the company’s rapid expansion.