The New South Wales Government has launched a six-week consultation on the future of data centre development, setting out a principles-based framework aimed at balancing rapid sector growth with increasing pressure on energy, water, and community infrastructure.
The NSW Data Centre Consultation Paper, released alongside the state’s latest project approvals, outlines how government intends to manage what it describes as a critical but resource-intensive sector. Submissions are open from 27 March to 8 May 2026 and will inform the development of formal planning guidelines.
The consultation comes as NSW experiences sustained growth in data centre investment, with construction activity rising at an average of 65 percent annually over the past three years. In 2024–25 alone, investment reached AUD 2.6 billion, representing around 12 percent of all non-residential building activity in the state.
The paper highlights the central role of data centres in the digital economy, noting that nearly all global digital activity depends on them and that the broader digital economy accounts for approximately 15 percent of global GDP.
However, it also points to growing infrastructure challenges. Data centres currently account for around 5 percent of NSW’s grid electricity demand, but this is projected to rise to 11 percent by 2030. Without additional generation capacity, this increase could place upward pressure on electricity prices and complicate emissions reduction targets.
Water demand is also expected to increase, with the government noting inconsistencies in existing forecasts and the need for improved coordination between operators, utilities, and planners.
Five principles
At the centre of the consultation are five principles intended to guide future development. These include ensuring data centre investment supports broader economic growth and technology ecosystems; requiring developers to fund infrastructure to avoid passing costs to households; mandating efficient use of energy and water; improving transparency of operational data; and adopting flexible, performance-based planning rules that reflect differences in location and scale. The government notes these principles are consistent with national data centre expectations released earlier in the week.
Energy and water infrastructure funding is a key focus. While developers already pay for direct electricity connections, the paper raises concerns that upstream transmission costs may be socialised across consumers. It proposes reviewing cost recovery frameworks and encouraging private agreements to ensure data centre operators contribute more fully to network upgrades.
On the water side, the government states that developers currently fund 100 percent of pipeline augmentations that directly benefit their sites, but flags the need for additional investment in recycled water and desalination capacity as demand grows.
The consultation also proposes a range of environmental measures, including potential benchmarks for Power Usage Effectiveness (PUE) and Water Usage Effectiveness (WUE), greater use of recycled water for cooling, and mechanisms to manage peak electricity demand. Options under consideration include battery energy storage systems and improved workload management to reduce strain on the grid.
Air quality impacts from diesel backup generators are also under review, particularly in areas close to residential or environmentally sensitive sites, alongside broader sustainability issues such as embodied carbon and e-waste.
Improved data transparency is another priority, with proposals for earlier disclosure of water demand forecasts and the potential use of smart water meters to support infrastructure planning and reduce uncertainty.
The consultation reflects a broader shift seen in other markets, where governments are seeking to balance data centre growth with infrastructure constraints rather than restrict development outright.
Implementation critical
Industry body Data Centres Australia welcomed the consultation, describing it as a constructive move towards a principles-based framework and acknowledging that many of the proposed measures align with current industry practices.
However, the association cautioned that implementation will be critical, warning that additional requirements must not slow approval timelines or undermine Australia’s competitiveness in attracting global data centre investment. It also highlighted the importance of alignment between state and federal frameworks to avoid duplication and regulatory complexity.
The NSW Government said feedback from the consultation will inform the development of formal Data Centre Guidelines, aimed at providing clearer assessment criteria while managing impacts on energy, water, and surrounding communities.