Environmental factors shape South Africa’s data centre and AI hub market

Johannesburg-based property law experts at Pinsent Masons attended the Pan African Data Centres Exhibition and Conference in Johannesburg in June, at which two themes ran central to the presentations and discussions: sustainability considerations of data centres and challenges that may be faced by developers.

Below, we explore the sustainability factors that shape the opportunities and challenges specific to data centre development in South Africa.

AI as an enabler of economic growth

According to analysis by technology consultancy firm Access Partnership, Sub-Saharan Africa could gain up to $136 billion worth of economic benefits from AI in 2030. More than $52bn of that benefit could be realised in South Africa, it said, highlighting particular AI-related growth opportunities in the consumer, retail and hospitality sector, as well as in manufacturing, professional and financial services, and in energy and mining.

This economic potential of AI is recognised by South Africa’s government, which has developed a national AI policy framework – a document it has described as “a strategic blueprint aimed at harnessing AI technologies to propel the country’s economic growth, technological advancement, and societal well-being”.

Published in October 2024, the document contains a range of “strategic pillars” that touch on the need for South Africa to have the skills, infrastructure, finance, incentives, regulatory environment, safety and security measures, and ethical and governance frameworks in place, for the policy framework to achieve the stated objectives. The policy framework identified the need for investment in digital infrastructure specifically, such as “robust supercomputing infrastructure to support AI research and development”.

For developers, South Africa’s pursuit of AI-related opportunities, and the government’s recognition that improved digital infrastructure is needed to underpin those opportunities, is a welcome signal that the country will look to get behind data centre projects.

Environmental factors

The growing use of AI by businesses and consumers entails ever-increasing demand for data processing power, which in turn raises sustainability considerations.

Technology consultancy firm Analsys Mason said last year that data centres are collectively responsible for between 1% and 1.5% of global energy consumption, with that figure expected to rise in the years ahead. It cited International Energy Agency estimates that suggest energy use by data centres will grow from 460TWh in 2022 to over 1000TWh in 2026, with the growth expected to continue until the end of the decade and beyond.

In South Africa, electricity considerations need to be at the forefront of plans for the development of power-hungry data centres.

For years, the South African economy has been blighted by rolling electricity blackouts. Until recently, Eskom, the state-owned national utility company, engaged in regular ‘load shedding’, which involves temporarily cutting electricity supply to different parts of the country at different times to avoid the collapse of the national energy grid and a nationwide blackout. While loadshedding has been curtailed in recent months, electricity insecurity and access to reliable, clean electricity remain at the forefront of developers’ considerations.

South Africa’s lack of transmission capacity restricts how much additional mega-watt capacity can be added to the grid, where grid connections can be enabled, and where the power can be transmitted around the country. Data centre developers exploring the South African market will need to consider whether they want to rely on an electricity system that is old, majority coal-power fed, and prone to outages and, if so, whether they can be flexible in reducing their consumption at times of system constraint. There are alternative options which can be considered.

Data centre developers globally are increasingly turning to ‘behind-the-meter’ solutions that entail installing their own on-site energy infrastructure, like solar panels, batteries and gas generators, to generate and store energy that gives them scope to support their own demands for electricity. Mini-grid solutions – localised electricity systems that operate outside the parameters of national electricity grids and serve multiple end users – are also increasingly being seen as an option for South Africa (7-page / 275KB PDF) to reduce reliance on the national grid and support decarbonisation objectives.

Further, the growing prominence of ‘wheeling’ in South Africa, aided by regulatory reforms and development of digital platforms, might also help data centre developers source clean energy. Wheeling is when electricity is produced in one area and connected to a grid but is sold to an end user in a another geographic location of the grid.

Energy is not the only environmental input factor that data centre operators need to consider.

Data centres rely on significant amounts of water to absorb and dissipate heat from servers and for preventing air moisture in server rooms from reaching levels that can do damage to equipment. As demand for AI grows, so too will data centre operators’ need for water.

According to researchers in the US, for every 10-to-50 word response that Chat GPT generates from a user’s query, it needs to “drink” a 500ml bottle of water, depending on when and where it is deployed. The researchers said that between 4.2 and 6.6 billion cubic metres of water will need to be withdrawn from water sources globally to meet projected global AI demand in 2027. Putting it another way, they highlighted, this equates to “more than the total annual water withdrawal” of Denmark or approximately half that of the UK.

South Africa is a water scarce country – a fact acknowledged by the Department of Water and Sanitation (DWS) in its national state of water report 2024 (61-page / 3.8MB PDF). South Africa receives around half the amount of rainfall as the global annual average and a high evaporation rate and climate change exacerbates water scarcity, the risk of which is particularly acute in areas like Gauteng and Western Cape, which the DWS said are “where high population densities converge with low freshwater availability”.

A recent article published by the World Resources Institute has highlighted how nature-based solutions, such as the removal of invasive plant species and more intensive riverine management, are helping South Africa’s cities tackle the issue of water scarcity. However, as the DWS acknowledged in its report, the country’s water distribution infrastructure requires heavy investment. Similarly to its energy infrastructure, South Africa’s national and municipal water systems are old and responsible for a lot of wastage.

For data centre developers considering projects in South Africa, site locations near the sea are likely to be attractive, though developers could turn to innovative solutions like water articulation systems to explore siting projects elsewhere. Those systems offer data centres operators control over water flows and scope to recycle the water they use in what is known as a ‘closed loop’ approach, contributing to the practice of circular-water use.

Data centre developers and the supply value chain of data centre components must also observe sustainable waste management principles and especially ‘extended producer responsibility’. Contributing to the circular waste economy of South Africa will contribute to the sustainability of the data centre market.

Why special economic zones might prove attractive

There are lots of factors that data centre developers must weigh when deciding whether to enter a new geographic market, such as the legal and regulatory regime in operation in that jurisdiction, and the ease with which they will be able to navigate the planning system and secure land use rights and permits. Access to finance, materials and skilled labour will also be relevant considerations. As we have described above, however, thinking about environmental and sustainability factors is now an imperative too.

In this regard, the special economic zones (SEZs) that operate in South Africa might be attractive for data centre developers exploring whether and where to site new projects. Examples include the Coega SEZ near Gqeberha, formerly Port Elisabeth, which has been popular with Chinese car manufacturers, as well as Dube TradePort and Saldanha Bay.

As well as offering certain tax advantages, South Africa’s SEZs provide businesses with ready access to skills and infrastructure, including offering ‘plug and play’ energy solutions. The development corporations that run them provide businesses with guidance and are a one-stop-shop for obtaining necessary permits and licences to operate – including water licences.