Bridging the energy gap: enabling Australia's National AI Plan and APAC data centre leadership

Australia's data centre market is rapidly expanding, propelled by surging demand for AI, digital services, and cloud computing; all of which require power reliability that exceeds current grid capacity. Australia’s stable political climate and regulatory framework make it an attractive destination for data centre investment, positioning the country to become the primary and trusted AI hub of the Asia-Pacific region. These favourable conditions give Australia a unique competitive edge in achieving Asia-Pacific regional leadership in digital infrastructure and AI capability.

The opportunity for Australia extends beyond the data centre sector. Data centre developers are starting to forward-fund the critical energy and other infrastructure that Australia will need to remain competitive over the coming century. This presents an exciting chance to deliver long-term benefits to the broader Australian economy, strengthening the grid and other infrastructure, accelerating renewable integration, and creating jobs, and enabling the digital backbone required for future innovation.

The Australian Federal Government’s recently released National AI Plan signals a clear aspiration for Australia to become a trusted leader in AI in the Asia-Pacific region. While the National AI Plan references the need for robust digital infrastructure and encourages innovation in energy solutions to support AI growth, it provides limited detail as to how this will be achieved.

To capture this opportunity and maximise investment in Australian data centres, it is essential to unlock access to sufficient power to meet the ever-increasing demand. Without addressing energy grid limitations and guaranteeing scalable, dependable power supply, Australia risks missing its chance to secure its status as the region’s leading digital infrastructure hub.

This need for innovation in energy solutions is only set to intensify, illustrated by the significant scale of investment and interest in Australia’s data centre sector. The NSW State Government’s recent approval of the Southern Hemisphere’s largest data centre with an estimated development cost of more than $3 billion, demonstrates the immense commitment from both government and private players (‘Australian data centres: NSW and Victoria compete to attract digital infrastructure jobs’, Australian Financial Review (AFR)). The sheer magnitude of the project, being a 540MW data centre comprising six four-storey data centre buildings, not only highlights the urgency for robust, future-proof energy capacity, but also signals growing confidence in Australia as a premier destination for digital infrastructure investment (‘CDC Data Centres Breaks Ground on New State-of-the-Art Data Centre Development in Marsden Park Industrial Precinct’, CDC media release).  

Nevertheless, the challenges of securing continuous, high-capacity energy supply from a constrained grid are already evident. Recent reports indicate that operators have been allocated only a fraction of the megawatt capacity originally requested for their operations by state authorities (‘We could lose the AI data centre race before we even start running’, AFR). 

The energy gap for Australia’s data centres

This shortfall underscores the existence of a significant “energy gap.” Closing this gap will require a multi-pronged approach that not only secures reliable energy supply to attract and enable valuable digital infrastructure investment but also aligns with Australia’s Net Zero commitments. Solutions must balance the urgency of powering data centre growth with the imperative to reduce emissions, creating a framework that supports both energy security and sustainability. This will require transitional strategies, such as hybrid models that embed long-term decarbonisation goals into planning from the outset. 

Any proposed solutions must be assessed within the context of Australia’s existing power and digital infrastructure landscape. Their feasibility depends on critical factors such as established customer demand for the digital infrastructure and the presence of mature cloud regions, which together shape both the technical and commercial viability of strategies aimed at closing the energy gap.

While Australian State and Federal governments race to develop policies that incentivise and unlock data centre investment, the most critical lever is providing long-term regulatory certainty. Clear, consistent guidance on how governments intend to address the energy gap will be essential, not only to attract investment but also to give operators confidence in planning for sustainable growth. In this context, transitional energy sources such as gas may play a role in bridging the gap, offering a reliable option to immediately supplement power capacity for data centre operations while also delivering complementary infrastructure that can unlock future efficiencies, such as enabling the transition to green hydrogen, as renewable capacity and storage solutions scale up over time. This comes amid broader conversation on gas usage, with the government working towards its soon to be announced domestic gas reservation scheme, aimed at securing local supply through federal intervention (‘Labor set to make major intervention to keep gas in Australia’, Sydney Morning Herald (SMH)).

In October 2025, the Trump Administration rolled back constraints on construction of natural gas infrastructure in the US to accelerate development of the energy infrastructure required to power AI-driven data centres and strengthen the grid resilience (‘Removal of Regulations Limiting Authorizations To Proceed With Construction Activities Pending Rehearing’, US Government Federal Register). .With various gas-powered projects being proposed in NSW and WA (Australian developer proposes gas turbines rather than renewables to power data centres, Renew Economy; ‘Data centre deal to fund Pilot carbon capture play in WA’s Mid West, SMH), Australia may be following a similar path. 

Self-sourcing energy supply

The challenges of securing continuous, high-capacity energy supply from a constrained grid have caused some data centre developers to consider more novel approaches to their power needs. While fully off-grid data centres offer theoretical advantages, they are generally not viable for most developments currently in the pipeline. The sheer scale of energy required, proximity to target customers and cloud regions, and the need to manage redundancy make full power independence challenging.

A potential alternative approach is the development of adjacent energy capacity, privately developed infrastructure co-located with and primarily serving the data centre, while maintaining grid connectivity. This model offers flexibility for import/export of power and can help address redundancy concerns.

Adjacent gas infrastructure also enables hybrid models that combine renewables with battery storage, using gas generation as backup. Gas remains essential due to its dispatchable, round-the-clock nature. Its ability to bridge renewable intermittency could provide the reliability assurance needed by the industry. 

Data centre economic zones

The scale of these projects provides complex regulatory challenges for data centre developers and operators to navigate, requiring significant buy-in, coordination and reform of regulatory settings at all levels of government. 

Current mechanisms such as Victoria’s Development Facilitation Program are a helpful starting point, as they allow for the streamlining of projects important to the State for economic, environmental or social reasons. However, a clear data centre tailored regime would be beneficial to promote confidence in developers to invest in the Australian market, such as by introducing a specific economic zone for data centres.

Specific economic zones which have been utilised by other countries could provide a tailored, specific regulatory environment for investment in the zone, to reduce delays and uncertainty for developers and unlock targeted community benefits. 

Domestically, there have been instances in which certain types of infrastructure have had special designation, which provides a framework to support quicker and more efficient planning approvals and also provides the necessary infrastructure through upfront state and regional planning. This includes Renewable Energy Zones (REZs) in NSW, which are designated areas under state legislation that coordinate and fast-track the development of renewable energy projects (‘What's a renewable energy zone?’, NSW Government EnergyCo). The REZs have the added benefit of promoting community investment and jobs, which assist with balancing community interests and new developments.

In this case, a specific economic zone for data centres could set a bespoke regulatory environment applying within the zone covering areas such as:

• community benefit frameworks and targets, including workforce and skills development programs;
• planning controls, environmental approval pathways and sustainability standards, which accommodate targeted settings that support adjacent energy capacity and the energy transition for data centre precincts;
• greenhouse gas emissions standards and reporting requirements, including energy efficiency targets and renewable energy integration to align with national climate commitments and attract ESG-conscious investment;
• tax and investment incentives;
• foreign investment frameworks, including ownership and control rules; and
• data sovereignty and cyber security standards. 

Political and community engagement 

Community engagement is vital for any practical and sustainable plan to implement the grand plans of major data centre developments and their associated power requirements to bridge the energy gap. Recent media coverage highlighting community concerns over the significant power demands of data centres underscores the need for clearer communication about their benefits to Australians. While the energy gap is a complex challenge, solutions must be communicated simply. Early stakeholder engagement and practical, easy-to-implement strategies that build community trust will be key to improving public acceptance, and establishing a dedicated economic zone for data centres could further support this effort. 

The National AI Plan flags that the Federal Government is developing a set of national data centre principles in partnership with the states and territories, to clarify what it looks like for investment in data centres to align with Australia’s overall national interest. Given the division of powers between the respective layers of government, this coordination is essential for success of the Plan. Securing bipartisan support for initiatives addressing the energy gap including the use of gas in providing dedicated power for data centres as a bridge to energy transition is not only advantageous but may also be imperative. 

Conclusion

Data centres have unique operational requirements, particularly their need to avoid redundancies and maintain uninterrupted service. This sensitivity to downtime means they require highly reliable, dispatchable power sources, making transitional fuels like gas and secure grid access critical in the short term. 

In contrast, less intensive energy users, such as certain commercial or residential applications, are better positioned to transition to renewables sooner without compromising reliability. This dynamic creates an opportunity for governments, the data centre industry, and the Australian community to work together and play a constructive role in accelerating the broader energy transition.

The reality is that, while the National AI Plan showcases encouraging sentiment, it is light on specifics regarding how its aspirations will be achieved. The success of the Plan hinges on Australia’s ability to deliver the energy and infrastructure required to support AI at scale. Australia has all the qualities of becoming a data centre hub, however addressing power capacity issues is required if further projects are to be developed. 

There are tangible solutions to bridge energy gaps, however the biggest hurdle is regulatory certainty. Clearly defined rules and regulatory certainty – including the potential implementation of economic zones – are necessary to make this a reality.