Local councils across New South Wales are urging the state government to halt approvals for new data centres until clearer rules are introduced to manage their heavy demand on electricity and water. The concern is that rapid expansion could strain essential services and limit the delivery of new housing.

The issue has been raised during a parliamentary inquiry examining the rapid growth of data centres. Councils such as Penrith and Ryde have been among the most vocal, pointing to the increasing concentration of facilities in areas like western Sydney and Macquarie Park.

NSW already hosts more than 90 data centres, with another 15 major developments recently accelerated, representing around $41 billion in investment. Many of these projects are clustered in key growth areas including Blacktown, Ryde, Penrith, Fairfield and the Hills Shire.

While technology companies argue that data centres are critical infrastructure for an AI-driven economy, councils are worried about the long-term impact on local communities. These facilities require significant amounts of power and water, raising questions about whether existing infrastructure can keep up.

The state government has begun consulting on new planning rules aimed at ensuring the industry covers the cost of additional infrastructure. This includes electricity connections, generation and water systems, with the goal of preventing added pressure on household bills.

Penrith Council has argued that no further projects should proceed until there is confidence that utility demands can be met without affecting local growth. It has also suggested that operators should be required to meet their own power and water needs wherever possible.

Energy forecasts add to the concern. The Australian Energy Market Operator expects data centres to account for 11 per cent of NSW’s grid energy use by 2030, up from around 5 per cent in 2026, highlighting the scale of future demand.

Photo by Planet Volumes

Ryde Council has raised similar issues, noting that development in its area has outpaced infrastructure planning. With multiple existing sites and additional proposals under consideration, it warns that essential services are already under pressure. The council also questioned the economic value of data centres, describing them as resource-intensive developments that create relatively few ongoing jobs while occupying valuable land.

Recent planning changes have already placed limits on new data centres in parts of Macquarie Park, but some councils believe stronger restrictions are needed. There are calls for the facilities to be treated as a separate category of development, with tighter controls on where they can be built based on infrastructure capacity.

The City of Sydney has proposed stricter performance requirements, including full cost recovery for infrastructure and a shift towards fully renewable energy use. It has also suggested that data centres should contribute directly to new energy generation, including solar, wind and battery storage.

Concerns have also been raised about the impact on housing. Some local leaders argue that data centres are effectively locking up large amounts of grid capacity, making it more difficult and expensive for residential projects to proceed. This could delay or reduce the number of new homes in key areas.

Other councils, including Lane Cove, have backed a user-pays approach, where developers would be responsible for funding the infrastructure needed to support their projects.

Industry representatives have pushed back against the criticism, arguing that the projected pipeline of data centres may not fully materialise. They also note that developers already cover the full cost of electricity connections and are investing heavily in renewable energy, with around 70 per cent of consumption offset through clean sources.

As the debate continues, the challenge for NSW will be balancing the needs of a growing digital economy with the demands of housing, infrastructure and local communities.