Managing the data centre boom: NSW Government seeks industry input

Following Monday's release of the Australian Government's national expectations of data centre and AI infrastructure developers, it's the turn of New South Wales, which this morning launched its NSW Data Centre Consultation Paper to canvass potential whole-of-government approaches to the regulatory environment for data centres and the sector's significant growth.

The Consultation Paper is released at an important time particularly for data centre developers and investors, with New South Wales already home to over 90 operational data centres, and a pipeline of proposals worth billions of dollars.

The message is clear: engage with Government on data centre policy and regulatory settings, and stay updated on the current and emerging regulatory, environmental and community risks and be prepared for increased and more formal scrutiny.

Context: 15 IDA-endorsed data centre projects

Today, the NSW Government also announced that 15 data centre projects will progress through the Investment Delivery Authority (IDA) process, which is meant to facilitate the approval and delivery of major investment projects in the State.

In brief:

• the 15 projects are worth about $52 billion;
  

• they were selected from 23 data centre and technology proposals totalling approximately $72 billion; and
  

• the announced projects (noting that one project was not disclosed due to commercial sensitivities) are mainly in Western Sydney and include projects in the Hills Shire, Blacktown, Penrith, Fairfield, City of Ryde and Lane Cove Local Government Areas.

Importantly, the Ministerial release signals that sustainability is a core assessment criterion, not merely an ancillary consideration, so data centre proponents should expect rigorous scrutiny of their energy sourcing plans, water usage effectiveness, emissions trajectories and community impact.

Key principles for data centre regulation in the Consultation Paper

Against the backdrop of significant Government support for data centre proposals (via the IDA process), the Consultation Paper sets out five key principles that are, at least initially, intended to facilitate discussions of sustainable and equitable investment into data centres, and to provide input towards a smoother planning process for State Significant Development (SSD) applications for new data centres.

1. Investment in data centres should enable a wider technology ecosystem that drives job creation and propels economic growth

This principle recognises that data centre investment should serve as a catalyst for broader economic development across New South Wales – to stimulate digital industries, attract foreign investment, and facilitate data sovereignty by offering locally governed, secure storage and sensitive information processing.

The potential practical implications are significant for business as the NSW Government intends to collaborate with data centre proponents to develop local content measures that would drive uptake of New South Wales and Australian products and services, supporting local supply chains and jobs in domestic manufacturing and construction.

Co-location opportunities for industries reliant on high-speed connectivity, low-latency workloads and large-scale compute access (including AI, fintech, gaming and remote healthcare) will also be explored. Businesses in these sectors in particular should consider engaging with the Government on potential incentives and planning frameworks that encourage clustering near data centre hubs.

2. Data centre developers and operators must fund their infrastructure requirements, in addition to what is already planned and funded, to avoid price increase for households

This principle is driven by the rapid growth in data centre energy and water demand, and its implications on the broader community, noting that the existing cost recovery approach was designed for gradual infrastructure augmentation across a broad consumer base – not for the significant step changes in demand that large-scale data centres create.

As noted previously, we expect that data centre owners and operators will be increasingly responsible for funding infrastructure costs, which are key themes arising from the NSW data centre inquiry and the Australian Energy Market Commission's draft reforms.

From a business perspective, data centre developers should be prepared to negotiate arrangements with energy and water utilities to fund required infrastructure upgrades, including upstream transmission projects. Power Purchase Agreements are suggested as a mechanism to mitigate wholesale price impacts, whilst also supporting new renewable energy generation and storage capacity. Water utilities may similarly require negotiated service agreements to ensure developers fund pipeline augmentation and capacity expansion. (Public and private sector utility services could be explored in this context.) This principle signals an increasing trend towards a user-pays model for large-scale infrastructure connections.

3. Data centres need to be efficient and make sustainable use of our energy and water systems as well as the environment

This principle highlights the need for data centres to operate within clear sustainability parameters. The Government is considering Power Usage Effectiveness and Water Usage Effectiveness thresholds, consistent with international benchmarks, while offering flexibility for site-specific constraints.

The need for sustainable data centre development and operation, in particular, dovetails with the Commonwealth's expectations of support for the energy transition and the responsible use of water.

The practical implications for business include consideration of recycled water for cooling systems where feasible and addressing the environmental impacts of backup diesel generators. The Government also intends to investigate circular economy measures, carbon measurement frameworks, and sustainability rating schemes, meaning businesses should prepare for enhanced reporting and compliance obligations.

4. Data centre approval and compliance must be based on reliable and transparent data

This principle underscores the need for accurate, timely information on energy and water demand from data centre proponents to support infrastructure planning and regulatory decision-making. Currently, precise data on data centre water demand is not readily available during the planning phase, creating infrastructure planning risks and uncertainty that could lead to stranded or strained assets. The principle envisages that data centre operators work with government and utilities to provide demand forecasts earlier in the process, with appropriate protections for commercially sensitive information consistent with frameworks such as the National Electricity Rules.

For businesses, this means proponents should anticipate requirements to share detailed energy and water demand forecasts at earlier stages of project development. The Government also intends to collaborate with industry to align forecasting assumptions -including default ramp-up rates, demand profiles, and mature utilisation factors -to improve the quality and consistency of demand projections.

5. Regulatory and planning settings must take account of differences in the size and location of data centres, and community needs

This principle advocates for a flexible, performance-based regulatory approach that recognises the diversity of data centre projects rather than imposing uniform requirements. Planning requirements should focus on project outcomes and resource impacts, allowing proponents to meet environmental, infrastructure, and service objectives in ways best suited to their specific circumstances. Greater flexibility is contemplated for data centres locating outside Greater Sydney, where energy, water, and land availability constraints may be materially different.

For businesses, this principle is relevant to site selection and project design decisions. Data centres in regional New South Wales may benefit from more accommodating planning settings, which could support regional economic development and reduce pressure on heavily constrained urban systems.