Australia’s backdown on data centres allows them to use energy from coal and gas.

It's official: Australia's data centre boom will not be solely powered by renewables.

At the National Cabinet meeting on Wednesday, the federal government softened its stance on using coal and gas to power energy-hungry data centres.

Initially, the government said it would require new data centres to rely on renewables, backed up by batteries and gas. However, this has changed. Its new standards, set to be legislated in early 2027, leave room for some jurisdictions to use fossil fuels instead. Queensland and the Northern Territory have welcomed this shift.

So what are these new standards? And how do they fit into Australia's energy "clean energy" transition?

Desperate for data

In our increasingly online world, data centres are a critical piece of digital infrastructure. These facilities store and process data around the clock. And they are needed to meet surging demand for generative artificial intelligence (AI), used in everything from health care to journalism.

However, both in Australia and overseas, local communities are increasingly worried about the potential risks of a rapid data centre rollout. These include strained water supplies, less land for housing, and persistent noise. Higher power bills are another concern, given how much energy data centres consume. The Australian Energy Market Operator estimates they will represent 13% of national grid demand by 2035–36, up from just 3% in 2025–26.

This week, Australia's state and federal leaders agreed to develop mandatory standards for large data centres. These will regulate how much energy, water and land these facilities use. They will also cover skills and training, such as providing apprenticeships for workers involved in constructing and operating data centres.

However, the new standards leave responsibility for planning approvals in the hands of each state and territory. And questions remain around whether the proposed rules would apply to existing data centres, of which there are more than 250 across Australia, not just future projects.

New standards are a step in the right direction. However, they leave some major regulatory gaps, particularly when it comes to individual states.

No national standard

The federal government's previous position required new data centres to pay for grid upgrades, avoid pushing up household bills and source additional clean energy, rather than simply rely on existing supply.

However, the new standards grant carve-outs for Queensland and the Northern Territory to use coal and gas. Queensland argues its publicly owned electricity system allows it to manage any cost or supply issues. The NT argues it should be free to use local gas, given it lies outside the National Electricity Market, which is largely limited to the eastern states.

Technically, this state-by-state approach could work. Data centres need "firm" power, or electricity that is available when renewable generation drops or is disrupted. The Australian Energy Market Operator says batteries, pumped hydro and gas can act as firming technologies.

Enforcement is key

However, these carve-outs must not compromise the government's goals of lowering climate emissions and ensuring that energy remains affordable.

That is why enforcement matters. Consider New South Wales, for example, whose new policy framework is built on six key principles. These include strong environmental and efficiency standards and no net costs to consumers and communities.

Developers wanting to build data centres that meet these requirements can get a faster 75-day assessment of their planning application. Non-compliant proposals are not automatically rejected, but do lose access to this fast-tracked process and can be modified, approved with conditions, or simply refused.

To properly enforce our new standards, Australia must learn from other regions.

The European Union requires major data centres to report their energy and water use. It is also developing a ratings system to compare how efficient each centre is, alongside minimum standards for energy consumption and water use.

In Ireland, the government considers various factors – including grid demand and broader renewable energy goals – when assessing new data centre proposals.

Ensuring communities benefit

Australia, like many countries, is racing to regulate its rapidly expanding data centre sector.

To do so, we can draw on international approaches that mandate clear approval processes and public reporting.

We must also engage communities throughout the development process, starting with early consultation. This will ensure data centre projects offer concrete benefits, such as shared energy infrastructure and structured apprenticeships, not just increased capacity.

We need more research about how data centres affect water supplies, peak power prices, noise levels and emissions. Importantly, studies must use real operating data, not just estimates provided by developers.

The federal government has given states and territories more say in how they power data centres. But strong enforcement is key to ensuring every project keeps energy costs low, protects the environment, and offers lasting benefits for local communities.