Data centre of attention: unpacking NSW's Data Centre Inquiry's possible moves

New South Wales is now home to over 90 operational data centres, more than a third of all data centre capacity in Australia. With a pipeline of State Significant Development applications valued at $29.4 billion, it's big business. It's also one facing increasing scrutiny.

The latest is a wide-ranging NSW parliamentary Inquiry into the regulation of data centres across New South Wales.

Many of the themes in the nearly 70 submissions are reflected in the Australian Government's national expectations of data centre and AI infrastructure developers and the NSW Government's Data Centre Consultation Paper. Taken together with those government publications, the specific concerns raised by stakeholders give proponents valuable insights to manage community engagement more effectively, and anticipate the likely focus of the Inquiry's report and the future of data centre growth and development in New South Wales.

Several submissions also highlight the critical importance of data centres for modern society, acknowledging their role as essential, enabling infrastructure. They recognise the increasing need for data centres and the economic and societal opportunities which data centres present when done well.

Energy demand

Energy demand was a central concern across most submissions. There was broad support for a "user pays" model for infrastructure costs, a position endorsed by both the Commonwealth Expectations and the NSW Consultation Paper. There was also recognition of the role data centres can play in stimulating renewable energy project development and electricity grid enhancements.

Separately, draft reforms from the Australian Energy Market Commission would introduce new technical standards requiring large electricity users, including data centres, to remain connected during grid disturbances and respond to instability. Proponents and operators should factor these emerging obligations into design and procurement decisions.

Water demand

Water consumption emerged as one of the most contested themes, with Sydney data centres currently drawing from the public drinking water supply. Multiple submissions, including from Penrith City Council, called for moratoriums on further approvals until water impacts are fully understood and utility servicing plans are confirmed.

The Commonwealth Expectations address this theme, requiring data centres to minimise water use, engage early with water utilities and communities on siting decisions, adopt efficient cooling technologies, prioritise non-potable water and pursue circular water opportunities. The NSW Consultation Paper also acknowledges divergent forecasts between Sydney Water and industry-commissioned modelling, flagging the need for greater data sharing and standardised demand assumptions.

Planning frameworks

Environmental and community advocates, as well as local councils, have called for a more strategic, evidence-based approvals framework – one that explicitly considers infrastructure servicing capacity before further applications are assessed.

The NSW Consultation Paper also highlights the value of a strategic planning framework and indicates that the Government is considering a flexible, performance-based approach – setting outcome benchmarks on Power Usage Effectiveness and Water Usage Effectiveness rather than prescribing uniform inputs.

Land use and national interest

Land use conflicts featured prominently in submissions, particularly in Western Sydney, where data centres compete directly with housing and employment-generating uses.

The NSW Consultation Paper signals that the Government intends to work with proponents to develop local content measures driving the uptake of NSW and Australian products and services, and to explore co-location opportunities for industries reliant on high-speed connectivity and large-scale compute.

The Commonwealth Expectations reflect these themes, requiring operators to invest in Australian skills and jobs, create fair, safe and well-paid employment and collaborate with governments, unions and education providers to address skills gaps. The NSW Consultation Paper's first principle further emphasises that data centre investment should catalyse broader economic development, stimulating digital industries, attracting foreign investment and facilitating data sovereignty.

Environmental and community impact

Backup diesel generators attracted significant attention, with community groups and environmental health bodies calling for stronger air quality regulations. Noise, heat and construction disruption in residential areas also featured prominently.

The NSW Consultation Paper's third principle underscores that data centres must operate within clear sustainability parameters, including addressing the environmental impacts of backup diesel generation.

Copyright

Some submissions highlighted the role of copyright on the ability of AI companies to train large language models. While the Copyright Act is a Federal law and more relevant to what is run in data centres rather than the construction and operation of the data centres themselves, copyright reform is nonetheless likely to be a pre-condition for AI companies to locate their training workloads in Australia and create demand for data centres.