Data centre development focus: “dirt to tokens” – planning approval speed and maintaining social licence

A series of recent State and Federal Government announcements have recognised the significant benefits of a data centre boom in Australia but also reiterate the need for a balanced approach when it comes to maintaining social licence, particularly in relation to energy and water infrastructure demands. 

The NSW approach

Investment in data centres in NSW has escalated 65 per cent a year on average over the last three years, reaching $2.6 billion in 2024-2025, which represents 12 per cent of all non-residential building development^[1].

Notwithstanding, NSW planning approval efficiencies remain one of the primary constraints to data centre development and investment with some assessment timeframes under the State Significant Development planning pathway taking near to two years. The question remains as to how Government will balance any planning approval fast-track arrangements with the communities’ expectations around sustainability of data centre developments and reliance on critical infrastructure.

Some of the answers are found in the NSW State Government announcement on 27 March 2026, which indicated that fifteen data centre projects worth $51.9 billion will progress through the Investment Delivery Authority (IDA). As a result, these projects will benefit from a fast-track planning approvals process and whole-of-government co-ordination facilitated by the IDA. The announcement also indicated that $40.7 billion worth of proposals related to data centres and technology were essentially “left on the table” on the basis that they were premature or overly speculative. 

Further, while acknowledging the importance and benefit of data centre investment to the State, the Government’s announcement was tempered by references to the need to responsibly manage sustainability of data centres, including in relation to water and energy. Currently, utility operators are grappling with the demand required and how best to manage and plan for data centre infrastructure requirements into the future. 

The NSW Data Centre Consultation Paper was released on the same day as the IDA announcement and identifies five key principles for managing data centre growth in NSW. 

1. Technology ecosystem: data centres need to drive job creation and propel economic growth. 

For example, through developing local content measures driving uptake in Australian products and services: IT hardware, power and cooling equipment.

2. Infrastructure: developers and operators need to fund infrastructure requirements. 

Cost recovery regimes for energy and water are to be reviewed to ensure that all upgrades and connections are paid for by the data centre proponent. 

For example, it is likely that the current practice of cost recovery from retail consumers for projects such as the delivery of the Renewable Energy Zones and associated transmission lines will be reviewed. Costs recovery will now also be likely from data centre proponents. Prior to any change to regulatory cost recovery regime, private commercial agreements between energy utilities and data centre proponents will likely become standard.

It is also no accident that the NSW Government announced that $34 billion of energy projects would progress via the IDA. Government sees data centre growth and renewable energy as inextricably linked given that data centres can provide a reliable base for Power Purchase Agreements (PPA). Through this strategy, the Government hopes to reduce any pressure on energy prices. 

While data centre developers currently fund water infrastructure augmentation, they also pay location-based developer contributions to Sydney Water (with additional costs recovery for any technical assessments and design). There is an indication that there will be a growing emphasis on data centre proponents improving and funding recycled water options or the water desalination treatment capacity. Prior to the operation of any permanent infrastructure, data centre proponents will likely be required to pay for and install temporary water infrastructure. While this is a costly outcome, it will allow for data centres to commence operations quickly and is something that many other large developers grapple with, for example, housing and industrial developers.

3. Sustainability: data centres need to be sustainable, particularly in relation to energy and water.
The focus will be on developing standards for Power Usage Effectiveness (PUE) and Water Usage Effectiveness (WUE) consistent with other advanced jurisdictions such as Singapore and the European Union, for example, the Singapore Government’s SS 564 Green Data Centre Standard. 

For energy, Government is proposing to work with industry in an effort to manage their grid-connected energy consumption during periods of high electricity demand or low generation, for example via natural gas generators or Battery Energy Storage Systems (BESS) installed on site. Importantly, Government will seek to discourage reliance on diesel generators for back-up power generation given that they result in air pollution and require environmental licensing under the Protection of the Environment Operations Act 1997 (NSW). 

For water and as noted above, the emphasis will be on exploring options for use of recycled water and providing supporting recycled water infrastructure for data centre developments. The intention being to reduce demand on drinking water supply and drought-proof the State. 

Other environmental matters that will be explored include:

• avoidance of sensitive areas, including in relation to schools, residential areas, etc.;
• developing a set of sustainability standards and rating requirements for data centres (noting that the State Environmental Planning Policy (Sustainable Buildings) 2022 and many of the ratings tools do not currently cover data centres);
• development of a carbon measurement and reduction framework bespoke to data centres; and
• e-waste initiatives. 

4. Transparency: data centre approval and compliance must be reliable and transparent. 

The Consultation Paper notes that precise data on water demand for a data centre is not available during the planning phase and energy data is often not of good quality. As a result, this creates infrastructure planning risks and uncertainty, which may lead to stranded or strained assets.

Accordingly, the intention is for data centre proponents to work with Government to provide reliable forecasting for water and energy demand, including by aligning assumptions.

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

Government has recognised that planning requirements need to be flexible, and based on performance outcomes rather than fixed inputs. This is particularly relevant given the significant differences in size and operating planning profile. For example, smaller data centres located outside Greater Sydney should have a different set of assumptions applied given the availability of water, energy and lower competition for land.

Consultation is open until 8 May 2026.

To further inform the way in which Government can strike the right balance, a NSW Legislative Council inquiry into data centres was announced. The terms of reference focus on whether NSW is equipped for current and future data centre growth, and whether plans adequately account for its immediate long-term impacts (see our earlier article for further information). The committee is due to report by 30 September 2026.

The Federal approach

In addition to the release of the National AI Plan in December 2025, the Federal Government also recently released their ‘expectations’ for data centres and other AI Infrastructure. This is substantially aligned with the NSW proposed five key principles. The Federal Government has indicated that they will prioritise and streamline approvals for proposals that: 

1. prioritise Australia’s national interest;
2. support Australia’s energy transition;
3. use water sustainably and responsibly;
4. invest in Australian skills and jobs; and
5. strengthen research, innovation and local capability.

Conclusion

To support the data centre boom and turn “dirt into tokens”, certainty of investment is required in Australia given the long-term nature of a data centre investment, being 40+ years. A key element to providing that certainty is speed of planning approval processes.

Victoria has managed to achieve a thoroughly streamlined approvals process for data centres with a recent 75-day assessment and approval period for the NextDC data centre development in Port Melbourne. NSW approval timeframes are far in excess of Victoria by comparison and improvements are required.

The recent IDA announcement for fast tracking approvals for select data centre projects is a positive step. However, there is potential for this to be frustrated by the outcomes of any NSW Parliamentary Inquiry later this year and consultation on the NSW Data Centre paper.

As Government and utility operators start to better understand the data centre business model and the water and energy consumption balance, decisive policy principles and regulatory changes will need to be made, and quickly so as not to frustrate data centre investment in NSW. 

^{[1] Page 3 of NSW Data Centre Consultation Paper – March 2026.}