OUT-LAW ANALYSIS 6 min. read
Proposed reforms will require large data centres to help fund new electricity. Photo: IR_Stone/Getty Images
30 Jul 2026, 9:47 am
As the country tightens its rules on data centres, developers who secure water and power assets early on will be best positioned to benefit from the next generation of data centre growth.
The federal government’s proposed AI reforms would require large data centres to help fund new electricity generation, contribute to grid upgrades, reduce demand during peak periods and minimise water use.
For developers, these are not just sustainability measures – they have the potential to fundamentally reshape Australia’s data centre landscape, not only in terms of how they are financed, but how they are built and operated in the decades to come.
While these reforms remain under development, the broader direction of travel is becoming increasingly clear. The recent launch of the GRESB Data Centre Assessment, a dedicated sustainability benchmark focused on issues such as energy supply, energy efficiency, water use and resilience, reflects the growing scrutiny that investors and policymakers are placing on the resource footprint of digital infrastructure.
For developers, energy and water are no longer peripheral operational considerations. They are rapidly becoming core determinants of project viability, financing and long-term value. They may also influence the allocation of delay risk, the bankability of customer contracts and the types of AI workloads ultimately hosted in Australia.
Below we outline five issues data centre developers should be focused on right now while the proposals are debated and finalised at both the federal and state level.
The days when power procurement sat in a separate workstream are ending. Under the proposed framework, developers will need a credible strategy for securing new energy supply. That could mean investing directly in generation and storage assets, partnering with energy providers or locking in long-term contractual arrangements.
Each approach carries different risks. Behind-the-meter generation offers greater control over supply and reduces exposure to grid constraints but requires additional capital and operating expertise. Grid-connected solutions may be simpler and provide access to larger and more diverse sources of power, but leave projects exposed to network constraints and connection delays.
The cost of the chosen strategy will also need to be funded. Lenders are likely to examine not only whether sufficient power is expected to be available, but also who bears the costs of generation, connection and related infrastructure. Expenditure on energy assets may increasingly form part of the project’s core capital requirements rather than remaining an operating cost incurred after construction. Ultimately, the real question is no longer whether power will be available – it is who will take the risk and pay for it.
If data centres are required to support new generation capacity, demand for power purchase agreements (PPAs) could surge.
If long-term PPAs become a primary pathway for demonstrating support for new generation, developers may increasingly compete for renewable generation, battery storage and credible development pipelines. Those who secure supply early could gain a significant competitive advantage.
That competition could create pricing pressure and make early procurement a strategic advantage, while also creating opportunities for renewable energy developers, investors and landowners. Sites capable of supporting data centres alongside nearby generation or storage may also become more commercially attractive.
Developers will therefore need to assess both the commercial and regulatory effect of different PPA structures. A direct agreement with a new generator may demonstrate a clearer connection to additional supply, but expose the data centre to the delivery and performance of that project. A portfolio arrangement may spread those risks, although it may provide a less direct link to a particular new source of generation and may come at a different price.
The structure will also need to account for the data centre’s demand profile. Renewable generation may not produce power at the same times or in the same quantities as the facility requires it. Storage, firming arrangements or additional grid supply may therefore be needed even where the developer has contracted for sufficient renewable generation in aggregate.
Developers should preserve flexibility in current procurement processes so that their chosen arrangements can be adapted once the government settles the relevant criteria. In a market where AI infrastructure growth is accelerating, access to clean power could become one of the industry’s most valuable commodities.
A completed data centre is useless if it cannot be energised.
The proposed reforms may create stronger links between data centre construction timelines and the delivery of external energy and utility infrastructure. If a grid connection, generation asset or utility upgrade is delayed, the developer may be unable to energise the facility and commence operations – even if construction has been completed – complete testing, obtain customer acceptance or begin earning revenue.
That gap creates a contractual risk and a potentially expensive problem. Developers may owe delay compensation or other remedies under its customer contracts without having an equivalent claim against the energy provider, network operator or utility responsible for the underlying delay.
Developers should align key dates, extensions of time, termination rights and delay remedies across their construction, energy, connection and customer contracts. Where possible, customer-facing liabilities should flow through to the party responsible for the delay.
Full pass-through protection may not be achievable. Energy and network providers may resist open-ended exposure to the financial consequences of a delayed data centre. Developers should identify any residual exposure early and consider how it can be managed through contingency, insurance, alternative supply arrangements or other contractual protections. This may become a key point for lenders who are likely to focus on whether the facility can operate and generate revenue at completion.
The reforms could significantly reshape what makes a data centre site attractive. Locations with strong access to power, water, transmission infrastructure and renewable energy resources are likely to become more valuable. Integrated developments combining data centres, storage assets and renewable generation may become particularly appealing.
Industrial-zoned land near transmission infrastructure, grid connection points or renewable generation may attract greater interest, particularly where it can also accommodate battery storage or other supporting energy assets. This could create opportunities for landowners, energy developers and investors to develop integrated energy and data infrastructure and strengthen the commercial case for co-locating data centres with solar, wind and storage projects.
The government’s focus on nationally consistent standards may also draw closer scrutiny to where major data centres are built. Projects in areas facing housing pressure, limited water availability or constrained electricity networks may encounter more complex approval pathways, even where the land is otherwise suitable. Locations that align with broader planning, infrastructure and community priorities may be better placed to progress.
At the same time, projects in areas with constrained electricity networks, water shortages or planning sensitivities could face greater scrutiny and longer approval pathways. The next generation of premium data centre sites may be defined less by geography and more by energy access.
One of the less discussed elements of the federal government’s AI Agenda could have a surprising impact on data centre economics. The government has indicated that Australian creators should retain control over how their content is used to train AI models. While the details remain unclear, future copyright settings could affect the viability of certain AI training activities.
Copyright settings may affect the economics of particular AI activities. If licensing requirements make large-scale model training more expensive or complex, some customers may place greater emphasis on inference, cloud services and deployment of existing models in Australia.
The resulting customer mix will affect financing. A long-term contract with an investment-grade hyperscaler will generally present a different credit profile from an agreement with a smaller AI company whose revenues depend on a developing product or building its customer base.
Developers may need to address that difference through pre-payments, parent guarantees, letters of credit, termination payments or other credit support. Replacement-customer rights and a diversified customer base may also reduce reliance on any single counterparty.
Financiers will likely undertake closer diligence on whether material customers have the rights required for their datasets and business models. Data centre operators will not necessarily be responsible for their customers’ copyright compliance. They should, however, understand whether an intellectual property or regulatory issue could affect a customer’s ability to perform a material long-term contract.
The rules are not final – legislation is expected to be introduced to Parliament early next year – but the direction of travel is clear. Smart developers are already stress-testing power strategies, re-assessing site selection criteria, reviewing contract structures and evaluating how future AI demand could evolve under different regulator settings. They should also examine whether their customer and financing assumptions remain robust across different AI workload scenarios
The biggest risk may not be getting the reforms wrong – it may be waiting too long to prepare. As Australia’s AI economy accelerates, power and water are moving from operation necessities to strategic assets. The developers who secure these assets first will be best placed to win the next wave of data centre growth.
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