The NSW Government has released a consultation paper establishing a principles-based framework for data centre investment in the state. The document, published in March 2026, sets out five principles covering economic contribution, infrastructure cost recovery, energy and water sustainability, data transparency, and planning flexibility. It invites written feedback over a six-week period and will inform the development of formal NSW Data Centre Guidelines.

The paper arrives at a specific moment. NSW currently has 90 operational data centres. Fifteen projects valued at $29.4 billion sit in the State Significant Development (SSD) planning pipeline. The Investment Delivery Authority, established in mid-2025 to fast-track major projects exceeding $1 billion, is assessing 26 submissions worth $100 billion in its first round of Expressions of Interest, some of which overlap with the SSD pipeline.

Data centre construction commencements in NSW have grown at 65 per cent per annum on average over the past three years, reaching $2.6 billion in 2024–25 — around 12 per cent of all non-residential building investment in the state. The consultation paper acknowledges this trajectory and frames the five principles as a way to manage what comes next.

It also explicitly aligns itself with the national data centre expectations published by the Australian Government on 23 March 2026, which CertifiedStrategic.com covered in detail in Australia Sets National Expectations for Data Centres and AI Infrastructure.

The Five Principles

Principle 1: Economic Contribution

Data centre investment should enable a wider technology ecosystem — not just serve as isolated facilities. The paper emphasises co-location benefits: industries reliant on low-latency connectivity, dense network ecosystems, and large-scale compute access should be encouraged to cluster near data centres. It also flags local content measures, noting that a significant share of data centre capital expenditure currently goes to imported components. The NSW Government says it will work with proponents to develop measures that drive uptake of NSW and Australian products and services, particularly in domestic manufacturing and construction.

Principle 2: Infrastructure Cost Recovery

This is the principle that will draw the most industry attention. The paper states plainly that data centre developers and operators must fund their infrastructure requirements such as energy and water, so as not to increase prices for households.

On energy, the existing cost recovery model was designed for gradual demand growth across a broad consumer base, not the step-change increases that hyperscale and AI-focused data centres represent. Data centres currently pay for direct connections and immediate network upgrades, but upstream transmission augmentations — including projects like the Sydney Ring South — are recovered from the wider consumer base. The paper notes that large data centres connecting directly to the transmission network would not currently pay toward the Electricity Infrastructure Roadmap, including Renewable Energy Zones and associated transmission lines, since those costs are recovered through distribution consumer retail bills.

On water, the paper raises a specific near-term concern: data centres' faster connection timeframes mean they are likely to consume spare water infrastructure capacity built to service future household demand. It calls for bespoke agreements between water utilities and proponents, including negotiated service agreements, to ensure data centres pay for the infrastructure upgrades their connections require.

Principle 3: Sustainable Resource Use

The paper proposes that data centres achieve Power Usage Effectiveness (PUE) and Water Usage Effectiveness (WUE) thresholds consistent with international benchmarks, referencing the EU's Directive 2023/1791 and Singapore's Green Data Centre Standard SS 564. It encourages the use of recycled water for cooling, acknowledging that access depends on location and that additional supply sources will likely be required over the next decade.

On energy resilience, the paper raises the question of on-site generation. It notes that Ireland's energy regulator now requires new data centres to install dispatchable generation. Most NSW data centres currently rely on diesel backup generators rather than battery energy storage systems (BESS). The paper flags that scaling diesel generation could breach NSW clean air protections, and suggests BESS and intelligent workload management as alternatives.

The paper also addresses circular economy obligations, e-waste, and embodied carbon. It notes that the NABERS energy rating tool for data centres does not currently cover water use trade-offs, and that industry feedback has called for better alignment with international standards. A partnership between the Green Building Council of Australia and Data Centres Australia is referenced as a potential pathway toward sector-specific sustainability guidance.

Principle 4: Data Transparency

The NSW Government says it needs reliable water and energy demand data earlier in the planning process. Energy data quality is improving through utility engagement, but water demand forecasts remain unreliable at the planning stage. The paper acknowledges that future demand data is commercially sensitive and must be handled confidentially, consistent with existing arrangements under the National Electricity Rules.

It proposes smart water meters at data centre sites and a collaborative approach to aligning demand forecasting assumptions, including default ramp-up rates, demand profiles, and mature utilisation factors, between industry, utilities, and government.

Principle 5: Planning Flexibility

The final principle calls for a performance-based approach to planning assessment rather than fixed input requirements. Data centres vary significantly in size, operating profile, and location and the paper argues that planning settings should focus on outcomes rather than mandating uniform solutions.

Regional data centres get specific attention. The paper states that greater flexibility should apply where infrastructure and resources are less constrained — explicitly noting that sites outside Greater Sydney may face different conditions around energy, water, and land availability. This directly supports the case for regional campuses like the Keppel Morwell facility in Victoria's Latrobe Valley, and aligns with NEXTDC's and AirTrunk's investments in non-metro locations.

The Regulatory Landscape Around It

The consultation paper does not exist in isolation. Three overlapping processes are now running in parallel:

Federal national expectations — Published on 23 March 2026 under the National AI Plan, covering five areas: national interest, energy transition, water sustainability, skills, and research. These are not formal regulation but will be used to prioritise projects through Commonwealth processes. As we examined in Which Australian Data Centre Operators Already Meet the National Expectations, operators with certified facilities and existing sustainability programs are already well-positioned.

NSW Legislative Council inquiry — A parliamentary inquiry into data centres in NSW is running concurrently, with submissions closing 27 March 2026. The Public Accountability and Works Committee, chaired by Abigail Boyd MLC, is examining planning frameworks, energy demand, grid impacts, water usage, and environmental and community effects. Hearings are expected in May 2026, with a final report due by 30 September 2026.

NSW Statewide Industrial Lands Policy — A parallel consultation is underway to establish a framework for planning and protecting industrial land across NSW. The consultation paper notes this will complement the data centre guidelines, as data centres are currently permissible in industrial and employment land precincts.

Industry Reaction

The federal national expectations, which the NSW paper aligns with, have received a broadly positive but conditional response from industry.

Data Centres Australia CEO Belinda Dennett said members already meet many of the expectations voluntarily, but flagged a significant concern: the exclusion of on-premises data centres from the framework. DCA argues that enterprise on-premises facilities account for roughly 80 per cent of Australia's installed compute capacity and can be up to 67 per cent less energy efficient than purpose-built commercial data centres. Mandala Partners research, referenced by DCA, estimates that if projected compute requirements to 2030 were met using on-premises servers rather than commercial facilities, national electricity consumption would be 629 per cent higher — adding 22 TWh of demand.

The Australian Conservation Foundation expressed disappointment that siting obligations were absent from the national expectations, calling for stricter rules on energy and water to minimise impacts on nature.

PwC Australia welcomed the guidance, recognising "both the scale of the global opportunity and the importance of getting the policy settings right to attract and retain long-term investment."

CRN Australia reported that some industry players have raised concerns about cost competitiveness with global providers, particularly given current market volatility, with TechConnect director Clint Thomson noting that the focus on local AI infrastructure could create cost pressures.

What Operators Should Watch

The consultation paper asks questions, but the direction is clear. NSW intends to move toward a framework where data centre proponents fund their own infrastructure augmentations, meet efficiency benchmarks referenced to international standards, provide water and energy demand data earlier in the planning process, and demonstrate economic contribution beyond the facility itself.

For operators already building to certified standards with established sustainability programs, much of this formalises what they already do. For operators or investors entering the Australian market without these foundations, the bar is being set. The Hosting Certification Framework and international standards like the EU Energy Efficiency Directive and Singapore's SS 564 are being positioned as the reference points and not optional extras.

The six-week feedback period is open. Written submissions can be directed to cg@infrastructure.nsw.gov.au.