Data centres – here today, here tomorrow: Water’s Evolving Role in Australia’s Data Centre Strategy

Alexandra Peace:

Hi, and welcome to Ashurst's Legal Outlook Podcast Series on data centres: Here today, here tomorrow. I'm Alex Peace, a real estate partner co-heading the data centre sector group in Australia. I'm joined today by two of our planning experts, Jane Hall, partner here with me in Melbourne. And Rebecca Dixon, a partner in Sydney.

This podcast is part of a series of podcasts where we connect with our global data centre teams and explore the data centre market in different jurisdictions across our network. It's fair to say in the data centre sector, there's a lot of focus on power. Today, however, we are discussing the role of water in the data centre sector focusing on Australia's approach regarding water and a national planning strategy.

Jane, I might move to you first. Is it fair to say Australia currently lacks an overarching water and planning strategy for data centres? And what are the legal and policy risks of this gap and what should a fit-for-purpose framework look like?

Jane Hall:

Well, in a word, yes, Australia does lack an overarching water and planning strategy for data centres. The first thing to note is that planning and water regulatory frameworks are in the current context, mainly state-based, and that the frameworks which do exist vary from state to state. So, I think, yes, it's fair to say that Australia does not have an overarching planning or water strategy for data centres.

From a Victorian perspective, there's also a lack of policy regarding data centres. I have water clients coming to me asking how they are to assess and approach the numerous potable water connection applications they're getting from data centres. They have no clear framework, or policy guidance to base their decisions on other than existing large user frameworks.

And they're coming to us to check how they should be assessing these applications, as they're in a way, second-guessing themselves, because they're receiving numerous freedom of information requests, seeking documents relating to application numbers and supply volumes, whether they be committed or planned. This then plays out in the media, which publishes the information obtained in FOI requests, and they publish that in a way which is designed to be headline-grabbing, often using peak rather than average water demand figures. This negative media coverage is raising the following policy issues, a perceived battle between data centre supply and the ability to supply residential uses and new housing, which is a priority for the Victorian government to address the housing crisis.

And there are, I think it's fair to say rising concerns about water shortages and the role that data centres play. And this all results in reduced social license for data centres as well as a growing demand for mandatory water efficiency standards. Now, as I say, the legal risks of this gap include regulatory authorities, namely local councils and water authorities, creating their own policy responses and frameworks to enable them to assess applications against, which obviously will create a patchwork of inconsistent approaches, which isn't helpful for the data centre industry, as well as review risk, whether that's been merits review in VCAT or judicial review for decisions that lack community support or for that matter, transparency.

I think the time is therefore ripe in Victoria for a coordinated policy response, which brings the regulatory threads together. And I understand that that's exactly what is happening, a government led working group. What that fit for purpose framework looks like will hopefully be revealed in due course and hopefully not too distant into the future given the rapid pace of DC rollout.

Alexandra Peace:

Thanks, Jane. And are you seeing similar themes in New South Wales, Rebecca? How are you seeing these issues playing out?

Rebecca Dixon:

So, we are seeing things emerging in a similar way in New South Wales. There are a few differences though that the planning framework for data centres in New South Wales is still a work in progress, absolutely. But to some extent, that's been a bit under the radar because the big focus for data centres is in Western Sydney and also parts of Northwestern Sydney, and they're already zoned for enterprise and industrial type developments. So, things can go through more easily. And so, in that sense, the regulatory authorities in the regulatory framework up here has had a good start out of the blocks.

There is a statewide planning policy in place here, which makes data centres permissible in all industrial business type enterprise zones. And if a data centre's energy consumption is more than 15 megawatts, that tips it into what we call the SSD bucket. So, the "State Significant Development" planning framework, which means it goes through the Department of Planning rather than the councils.

Most data centres of any size will trigger that threshold, so there is a centrality and uniformity assessment, which does bring its own benefits. And another benefit of how things work here in Sydney is the planning frameworks - In terms of planning frameworks, we've just got the one water authority for all of Sydney, the Illawarra and the Blue Mountains. So, that's Sydney Water and it does all of the water supply and stormwater sewage recycling. It does the lot.

So, with just one water authority, there's a much better opportunity to have a consistent approach to develop policies that apply across the board and have a look at water reuse and harvesting type schemes as well. But it's early days and the planning for water supply for data centres and other uses is still emerging. Just as a contextual issue that looms large in Sydney is we are in a period of high rainfall and have been for a while, but most of us can remember the millennium drought and how bad that got. And so, we really need to focus on regulatory frameworks that will work not just now, but in the future when eventually we're back in drought again.

Alexandra Peace:

With the measure of electricity tipping it into the SSD bucket, is that electricity alone or do they also look at the water requirements?

Rebecca Dixon:

So, at the moment, it's just energy consumption. Water doesn't factor into the test. Haven't come across any consideration of whether it should. Certainly, it's not been the highest focus here. So, I think energy consumption is here to stay as the trigger.

Alexandra Peace:

Thank you. Jane or Rebecca, how might Australia learn from international initiatives like the Climate Neutral Data Centre Pact and what legal mechanisms could drive similar commitments here?

Jane Hall:

Well, I'll take this one, Alex. Australia's well-placed to learn from global experience, although I think one of the important things to note is that water is a local issue. So, the importance of local factors can't be overlooked. For example, to assess a data centre's water use and understand any impact it may have on the community and the local environment, you need to understand whether there are any, for example, current or future restrictions on water use that are likely in the area, what other users are competing for the water - and it's important to understand that the environment is one of those users that is competing for that water supply - how much unallocated water there in fact is, as well as the climactic conditions. And I think one of the other important things to understand is what cooling systems a data centre is proposing to implement.

So, those local factors can't be overlooked in terms of understanding how to approach these issues. But the Climate Neutral Data Centre Pact, which is a voluntary industry agreement that more than 90% of Europe's data centres have committed to, does provide a very useful point of reference for Australian policy makers. That pact applies to new data centres from 2025 and sensibly links water use effectiveness to climate. For example, in a high potable water stress area in a hot climate, which I've taken as the most relevant analysis for us, the required water use effectiveness is 0.44 litres per kilowatt-hour.

Now, you might be wondering what that means and water use effectiveness is determined by dividing the annual water use by the annual IT energy use for a data centre. So, this water use effectiveness could be used in Australia as a means of assessing applications.

It's also important to understand that other voluntary frameworks are also being developed. I understand there's the water stewardship in Asia Pacific. Alternatively, vehicles such as the NABERS Star Rating system, which only currently applies to data centre energy use, could be expanded to include a water framework for DCs.

But building on what Rebecca said earlier, I think one of the things that I've noticed in the applications that I see for data centres coming across my desk is that the focus is very firmly on energy, and water is a passing reference. And I think we're going to see that change over the coming months and years.

Alexandra Peace:

Yeah, it's certainly interesting because all the commentary associated with data centres does focus on the electricity requirements rather than water. In terms of engagement between data centre developers and water utilities, how can that be improved to optimise planning outcomes and avoid speculative or duplicative applications?

Jane Hall:

Well, I think this is a big issue for water authorities because speculative applications do create planning churn and delays. However, duplicative applications and their reporting in the media doesn't help with the social license for data centres, given the number of applications and the amount of water being required by data centres appears to be greater than it actually is. So, the picture being painted to the public in the media doesn't necessarily reflect the reality of the number of applications that will actually be constructed. However, I'm also sympathetic to the data centres who want to secure the best site for their projects, and that requires a swift and confidential often assessment of land availability, the planning controls, as well as energy and water availability.

And connections to utilities can create the most significant delays for getting a project off the ground. And there's a risk associated with putting all your efforts into one site at an early stage of concept design. But I do think that early engagement is essential because water plans and water supply assets are long-lived and have really long lead times. Now that's obviously a rub point given the dynamic speed to market that data centres are trying to achieve. In terms of the how, there are definitely opportunities for both water authorities and data centres in coming together early in open and transparent communications.

For example, can they explore together innovative arrangements that they could enter into to bring forward the construction of alternative water supply infrastructure, such as water recycling plants? Data centres would provide water authorities with an ideal long-term recycled water off-take arrangement. In fact, Air Trunk's CEO was reported in The Australian Financial Review (AFR) as expressing frustration over decision-making at water authorities being too slow in relation to a touted $50 million investment in a water recycling project that they're proposing.

Alexandra Peace:

So, given all that, Jane, what planning mechanisms can help streamline approvals while ensuring long-term water security and reliability for both data centres and communities?

Jane Hall:

This is interesting given the lack of guidance in this area at the moment. What has been done to date is to offer a quicker planning approval pathway for data centres to go through the development facilitation pathway with the minister for planning as the decision-maker rather than the local council. And that sounds similar to what's happening in Sydney. For example, data centres with a development cost of at least $20 million in metropolitan Melbourne can use this pathway. However, coming back to the social license point, this is then reported in the media as being rammed through without counsel or community oversight. These applications would obviously be referred to water authorities, but perhaps the problem seems to be the perceived lack of transparency that the community is rebelling against.

In terms of what else can be done, if we look to the UK, they are making changes to planning policy, requiring that planning and responsible authorities for planning schemes are required to consider the need for data centres when setting local policies and deciding planning applications. In the United Kingdom, they are also proposing to introduce AI growth zones, areas where there will be fast-track planning and infrastructure support for data centre applications. However, the applications must be accompanied by a statement from the water supplier that the site has sufficient access to water. And my understanding is that Cambridge Water has said that it would only provide such a statement if it believes that water could be supplied sustainably and without impacting existing customer supplies and resilience.

Alexandra Peace:

It's an interesting point you make there, Jane, about fast-tracking planning in the UK. So, I recently spoke to Charlie Reid (for our listeners, he's one of our UK planning experts), and he echoed your comments. What they're seeing in the UK right now is a government that's very much saying yes to development. However, they're also seeing planning approvals for projects challenged because of failure to have a necessary EIA, this is the concept of an Environmental Impact Assessment, whether you assess whether or not the development project is likely to have significant effects on the environment. So, there's a mobilisation of lobbyists who have concerns for the climate and the environment, finding a way to articulate their objections against a planning permission.

Did you have anything to add on that from a New South Wales perspective, Rebecca?

Rebecca Dixon:

Yeah, look, I would say two things about that. First of all, just on the issue of delays in the need to streamline approvals, that absolutely is the case in New South Wales. So, we've currently got 22 data centre applications before the Department of Planning, and there's others before the different councils. So, an assessment takes a long time. But in terms of what might help, so as listeners probably know, there's planning and environmental laws also apply at the Commonwealth level with the EPBC Act, and we have major reforms to that act in Parliament at the moment as we speak. So, one of the key drivers for those reforms is cutting the green tape that's holding up development of renewable energy projects, and that's relevant to data centres as well.

A requirement for approval under that act is triggered where a project has what's called a "significant impact on a matter of national environmental significance". So, water use by data centres is not one of those triggers. The most common trigger that we see is certain species. Now most data centres are in urban areas at the moment in New South Wales. So, they don't typically trigger the EPBC Act, but some of them will. And that will mean they've got to get planning and environmental approvals at both the state and the Commonwealth level. So, there's definitely opportunities for data centres to benefit from environmental reforms that are being debated now.

Looking for a moment at legal challenge risk, New South Wales has what's called open standing. So, that means any person can bring legal proceedings to challenge any planning approval. It's a very widely used avenue by objectors, community groups, even competitors. So, it's an area that we operate in frequently. And the reality is that individual data centres can't and shouldn't have to resolve the legal challenge risks and the regulatory issues because that's not how the planning system's being designed. So, the planning system involves an application being made by a data centre operator for a new data centre say, and the environmental assessment is done for that data centre and the decision maker does consultation with the community and everyone has their say. And then the decision maker weighs up the impacts and the benefits and decides whether to grant approval.

And the courts can't fix these regulatory issues either when a legal challenge is brought, because their job is only to apply the legislation and the frameworks as they are. So, there's a lot of inertia in the system and that ultimately falls to government and the water authorities to do the required strategic planning and set the frameworks.

Jane Hall:

It's interesting because in Victoria, we're moving completely away from any concept of open standing. We've got a bill before parliament that is looking at effectively, I guess adopting a New South Wales concept of the deem to satisfy applications. So, instead of a one size fits all application approach, they're looking at introducing three different stages of approvals based on the level of risk. So, a very standard tick the box application would be approved in 10 days, and there would be no referral or community consultation associated with that at all. The second level of that proposed application pathway would be potentially resolved within 30 days by the council. And again, there would be no ability or requirement to actually consult with the local community in relation to those applications at all. And then the third level is the current process, but they're looking at winding back the objection and appeal rights. And so, only people that were directly notified of the application who could be directly impacted by it will have a right to appeal on the merits to VCAT. And I think what we're going to see as a result of that, if those laws are actually passed, is that judicial review applications are going to become more important because the community will still want to have a say, but they won't have any ability to seek review of the merits in the Victorian Civil and Administrative Tribunal

So, it seems like it's quite a different way of approaching things in the two jurisdictions.

Rebecca Dixon:

That's really interesting what's going on in Victoria, and I should say in New South Wales, we do not have merit appeals by objectors for most developments. There's only a smaller category of developments that go that way. And absolutely that is one of the drivers for why we see more judicial review legal challenges, and I think that's really the focus for data centres in New South Wales in a legal challenge world.

Alexandra Peace:

So, thank you for those insights. Coming back to something you were talking about earlier, Rebecca, it was future-proofing data centres against drought. We're obviously not in drought at the moment, but we do remember the drought day as well. And when I spoke to Charlie Reid recently about the UK's approach regarding water and the national planning strategy, he mentioned water neutrality and water scarcity is an issue in the UK development sector. In the face of increasing drought risk in Australia, what strategies can data centres adopt to ensure resilience and continuity of operations?

Rebecca Dixon:

So, there's a few things that come to mind, but at the forefront of this is that water scarcity in Australia is very much a regional issue, as Jane mentioned earlier. So, there are areas in Australia where water is more plentiful and will always be more plentiful. So, certainly, there is a location selection factor that plays into this. And in Sydney, for example, water use currently for data centres isn't actually that significant. Even though when you read the media, it seems to be a bigger issue or thought to be a bigger issue than it actually is. So, at the moment, for example, data centres in Sydney use about 1% of the total water demand. So, it's not a lot, but certainly the planning is underway for that to increase very significantly and particularly with AI.

So, there are estimates by Sydney Water that might jump to say 20% within about 10 years, so 20% of the water use in Sydney. So, absolutely there is an issue for looking at future proofing the data centres against drought. The second thing I'd say about that is that there is a huge opportunity for water harvesting and reuse. So, the water quality of the water used by data centres, it is very important, but it isn't the only issue and there is a whole lot of water that is out there that could potentially be reused or harvested, particularly in industrial areas where water is used, but not retained by some industrial users. So, certainly opportunities. The difficulty is getting the frameworks in place and the arrangements and just getting those projects up and running.

Jane Hall:

I completely agree with Rebecca that investing in climate independent water supplies will ensure resilience. And whether that's rainwater, stormwater, recycled water or desalinated water supplies and all of those options differ on cost in terms of whether that's an upfront cost or ongoing costs and savings, their yield and associated energy use. I also think that the data centres can make climate conscious cooling decisions. Meaning, that they choose cooling technology in a way that balances the availability of carbon-free energy and responsibly sourced water to minimise climate impact overall. And that choice needs to be based on a series of factors, whether that's local climate, cost and availability of power, localised water stress, for example.

And there's I think a current generational shift in the cooling approaches that are being used by data centres. For example, we're now seeing direct chip, liquid immersion and closed loop systems. However, one thing I'm not quite sure people really appreciate is that achieving less water use can mean higher power use, which is why those factors need to be balanced, as well as taking into account other factors like social license given some solutions will also increase noise generation, which might be problematic in a planning sense if you are building into or close to a residential area or an area that may become a residential area in the future.

Water use also depends on the safe operating temperature of the equipment, which is primarily determined by the manufacturer rather than the data centre operator. For example, a lot more water is required to maintain service at 26 degrees compared to 35. Therefore, I think equipment selection for data centres is also key.

Alexandra Peace:

Thank you, Jane and Rebecca for your interesting insights. We're just about out of time, but I would like to perhaps bring a few things together. So, water is fast becoming a strategic objective that has to be secured up front in a similar way to power. There is a trade-off between energy and water efficiency. Social license for data centres will require increasing transparency in respect to water use and water supply sources. And there will be an increasing expectation that water not come from potable water supplies, unless there is large-scale augmentation of potable water supplies, so it becomes rainfall independent, e.g., additional desalination plants.

Thank you to our listeners for joining us. If you would like to know more about Ashurst data center experience across our global networks, please do get in touch or visit our data centre hub on our website at www.ashurst.com, where you can find a host of information including our jargon busters and much more.

Also, look out for our M&A "Ahead of the Deal". Links are available in the show notes to this podcast. For now, thank you very much for listening and goodbye.