The Climate Council welcomes the opportunity to make a submission to Infrastructure NSW’s consultation on data centres in the state. NSW and Australia are in the midst of a critical energy transition, rapidly shifting from fossil fuels to renewable energy to cut emissions and protect communities from worsening climate impacts. Without careful management, the new wave of data centre development, driven largely by the surge in demand for artificial intelligence (AI) and cloud computing, will put this transition at risk. But, with strong, clear and enforceable policy settings, data centres can drive new clean energy investment and support a resilient electricity system.
Data centres have been in Australia for many years. They are important digital infrastructure that underpin everyday services and essential functions across the economy and government. However, the scale and pace of new data centre development will shape our energy system for decades to come. Without additional renewable generation, storage and system flexibility to match demand, the industry risks locking in continued reliance on coal and gas, increasing electricity costs, straining system reliability, and creating a material risk to NSW meeting its legislated climate obligations.
As an independent, evidence-led climate organisation, the Climate Council’s submission focuses primarily on issues relating to: electricity demand, grid impacts, implications for NSW’s legislated renewable energy and climate targets, and water use. We acknowledge the broader social and ethical concerns around AI, particularly generative AI, which is driving a significant share of new data centre demand. While important, these issues are distinct from the impacts of physical infrastructure and fall outside the scope of our submission.
Countries around the world are setting stronger standards for data centres in response to their rapidly growing energy and water demand. The industry and its customers are already taking steps to procure renewable energy and firming capacity, alongside measures to improve energy and water efficiency – often driven by their commercial interests. As this well-capitalised industry expands, strategic policy settings and coordination will ensure that it delivers tangible public benefits alongside private returns. Done well, data centres could accelerate the shift to renewables, strengthen the grid and support regional economic development.
The NSW Government has a critical window of opportunity to set sensible, pragmatic policy settings for the data centre industry. By embedding best-practice requirements into planning and approval processes, the Government can support both economic development and climate progress.
RECOMMENDATIONS
1. Require additional renewable energy and firming capacity to match data centre demand
Data centres in NSW must be required to support the development of new wind, solar and firming capacity – beyond what would have been built without the industry’s demand and support – reflecting both the scale of their electricity demand and their capacity to contribute to system-wide outcomes. This should include:
- Establishing credible mechanisms to demonstrate additionality. For example, proponents may be required to provide evidence of pre-financial close Power Purchase Agreements (PPAs), together with use of Renewable Energy Guarantee of Origin (REGO) certificates to ensure ongoing location and time-matching.
- Considering interaction with the NSW Infrastructure Roadmap, Long-Term Energy Service Agreements scheme and the Australian Government’s Capacity Investment Scheme to ensure additionality.
- Consideration of the need for mechanisms to account for renewable development timelines, for example requiring 100% renewable energy within the first three years of operation.
- Putting safeguards in place to ensure that at a minimum, any new data centre’s energy use is no more emissions-intensive than NSW’s grid from day one of operations. This must include rules to prevent data centre operators from building off-grid fossil fuel generation, which would be a material step backwards for the state’s clean energy transition.
- Reviewing planning processes and grid access rules to support data centres to access new renewable energy supply at the speed and scale required.
2. Make efficient data centres the standard
All new data centres in NSW should be required to minimise both energy and water use. Data centres already seek to optimise their water and power. However, there is a clear role for government to reinforce and standardise these efforts by setting consistent, transparent performance benchmarks. This could include, for example, requiring a minimum five-star NABERS Energy rating, alongside a defined Water Usage Effectiveness (WUE) threshold. Establishing clear outcome-based standards would provide greater certainty for industry, create a level playing field, and build public confidence that data centres are using energy and water resources responsibly.
These benchmarks should be regularly reviewed and progressively strengthened to reflect technological advancements and evolving industry and international best practice.
We also welcome the NSW Government’s commitment in the consultation paper to consult on drought management and data centre growth.
3. Require flexible demand backed by low emissions technologies
The Energy and Climate Change Ministerial Council (ECMC) has committed to explore options to ensure new data centre loads are efficiently integrated into the grid, including developing a framework to facilitate demand flexibility and ensuring new firmed generation enters the market as data centre demand increases, and advancing reforms for grid connections (ECMC 2025). The NSW Government should engage with this process and ensure any state-based requirements are aligned.
As part of this, reliance on fossil diesel for backup generation should be minimised as far as possible. Different approaches will suit different facilities, with options including co-location with battery storage and use of alternative fuels. Data centres and their customers should also be encouraged to manage their workloads in ways that support the grid where possible, for example shifting non time-sensitive workloads to the middle of the day, while performing only essential tasks – or drawing on battery storage – during peak demand times.
Alongside these requirements the NSW Government should consider government action needed to support low emissions flexible demand, for example measures to support the development of alternative fuel supply chains and reforms to better enable installation of battery storage.
4. Protect households from rising electricity costs by ensuring data centres pay their way
The Climate Council welcomes the consultation paper’s statement that cost recovery regimes should be reviewed to ensure any network upgrades required for data centre connections are paid for by data centres. We note ECMC is currently undertaking work to review the cost recovery arrangements to ensure data centres cover network upgrades and data centre growth (ECMC 2025).
An equivalent review should be considered in relation to water infrastructure, ensuring data centre growth does not shift avoidable costs onto households.
As noted in the consultation paper, while regulatory regimes are reviewed and actioned, utilities should be encouraged to negotiate agreements with developers that ensure data centres pay for any infrastructure upgrades required.
5. Strategically site data centres and share benefits with communities
The NSW Government should encourage data centre development in regional NSW where workloads allow, to minimise grid constraints in urban hubs and support regional economic development. This could be achieved by providing prioritised approvals and connections to data centres in regional areas with high renewable generation (provided they meet all other sustainability benchmarks). This must be supported by robust frameworks for community engagement and benefit sharing, that are at minimum aligned with NSW’s benefit sharing guideline for renewable energy projects.
6. Consistent forecasting and reporting
The Climate Council supports the commitment in the consultation paper to collaborate with industry to improve approaches for forecasting water and energy demand, including by aligning assumptions. Reliable and transparent data on the magnitude of future water and energy demand is a critical foundation for effectively planning for and reducing impacts.
The significant variation between industry and utility/regulator estimates shows there is a need for governments at all levels, and industry, to work together to develop a nationally consistent framework that balances commercial sensitivity and security considerations with best practice reporting standards. This should be underpinned by a requirement for data centre operators to disclose and report consistent information on clean energy procurement, electricity use, water use, backup generation and emissions, to support improved system planning and accountability.
7. Coordinated planning to enable innovation
Data centre development spans various policy areas, multiple levels of government, regulators and utilities. Effective coordination across these institutions and industry is essential to mitigating the risks of data centre growth, and harnessing the potential benefits — for example, by aligning data centre growth with renewable energy development.
The NSW Government should develop a framework for a coordinated approach to data centre development and approvals. Victoria has adopted such an approach through its Sustainable Data Centre Action Plan, designed to improve government coordination of data centres and attract investment while ensuring growth is “well planned, efficient and responsible” (Victorian Government 2026). As part of coordinated work to manage data centre growth, the government should work with stakeholders to ensure that the regulatory settings and infrastructure required to enable sustainable data centres – and decarbonisation of the rest of the economy – are delivered at the pace and scale required. We welcome the NSW Government’s announcement on 6 May that it will introduce legislation enabling it to identify the highest-priority renewable energy projects in the planning pipeline, and prioritise them for streamlining (Sharpe and Scully 2026).
