The golden ticket - opportunities and emerging risks with a data centre connection agreement
The data centre’s ‘golden ticket’
For the open access network, the Network Service Provider – such as Endeavour, Ausgrid, Transgrid - has to offer a path for connection to a data centre. Whether there is sufficient capacity in the network is another question, but for now, this follows the connection process which adheres to the National Electricity Rules set out by the Australian Energy Market Commission which at a high level consists of 3 stages:
A 5.3.2 connection enquiry
A 5.3.4 application to connect
And a grid connection
This formal process also takes into account the proponents ‘readiness’ i.e. have they purchased the land for the proposed data centre, is there financing secured, construction partners in place, and maturity through the planning system. The NSP is sizing the data centre up – are they a serious player or another property developer kicking around the idea of turning an existing industrial site into the latest fashionable thing.
The data centre proponent would do well to keep in mind the commercial interests of those Network Service Providers who are looking at any opportunity to increase its regulatory asset base.
Risks involved with a connection agreement
Putting aside technology risk of the data centre facing obsolescence as power density requirements and cooling technology evolve, or concentration risk of a single hyperscale tenant moving on – important I think to spend some time looking at the connection agreement risk as it relates to the NEM.
What it gives you – an agreed maximum MW capacity in exchange for a usage charge which is determined via the Transmission Use of System (TUOS) payments.
This is the first move for data centres as it avoids the capex and complexity of building its own generation and storage required for its load profile.
Now to the risks, which need to be better understood.
With the grid connection, the data centre is now a NEM participant meaning:
The data centre can be asked by the Australian Energy Market Operator to curtail or load shed should it be required to maintain system frequency. Fine, and the response has been to use on-site diesel generators to plug any shortfall or be activated during peak demand events. Risk here is further capex spend and regulatory uncertainty as the regulator could look to challenge this default option given stacking diesel generators is incongruous to legislated emissions reduction targets.
More existential is AEMO’s due diligence could lead to energy ministers mandating data centres to ‘flex’ load which is at odds with commercial objectives which require flat, continuous, reliable data service uptime. A data centre that cannot meet 24/7 uptime for their customer base risks losing the contract, as they will shift to a provider who can.
On page 39 of AEMO’s 2025 Electricity Statement of Opportunities, the door is left open for data centres to provide ‘more demand flexibility’, to explore whether ‘potential load shifting may be plausible’.
Worth noting here AirTrunk are trying to get in-front of it and position it as a feature, not a bug, with load shifting to be adjusted so ‘it responds to the needs of the power networks, which could prevent price spikes and rolling outages’ (The Energy). AEMO agree in principle and are reviewing whether the timing of non-urgent computing tasks aligns with renewable generation peaks – i.e. the significant abundant rooftop solar that is available during the middle of the day.
Now add the layer of political risk. The energy ministers at their last Energy and Climate Change Ministerial Council meeting on 8 May 2026 agreed:
“Data centres on the NEM and WEM should invest in additional renewable generation and firming in their state of operation to fully offset their electricity demand and provide flexibility services to avoid additional costs being borne by other energy users. Further, data centres should provide transparent reporting on their energy use and emissions production.”
To what extent, and who is in scope are all live questions. But the regulatory response in Australia is becoming clearer – data centres will be forced to spend more capex on generation and storage once they are handed that golden ticket.
Interestingly this ruling does not extend to Queensland, where its Minister for Energy refused to agree to the proposal, so perhaps the state of Queensland just got more appealing for data centres to prosecute as a place to locate as connection queues remain stalled in NSW and Victoria?
And note energy ministers do not address the possibility of wholesale power prices increasing as a result of data centres soaking up available demand. If that was to happen, then the political response moves rapidly to restrictions and possible moratoriums, especially as the energy debate in Australia has shifted from reducing emissions, to reducing consumer electricity bills.
Trust is good, control is better
Now as I understand it, frontier AI data centre proponents are rather cost-insensitive, and the rule of thumb I draw upon is OpenAI’s CFO quoting the astonishing metric of 1 GW of power converts to $10 billion in revenue per year. Note however this is not a blanket rule for all data centres as colocation and cloud operators are not as cost insensitive.
So if rising costs – broadly speaking – do not phase data centres, then how to speed up the process to get those electrons flowing and revenue realised?
Can continue to sweat the existing transmission network, ramp up MW requests slowly, and accept a far greater cost and regulatory burden and political uncertainty for the next few years. And as I am laying out here, the golden ticket may not be enough to provide uninterrupted firmed power to meet the insatiable customer demand for electrons.
Or instead, do it yourself.
If your view of artificial intelligence is bullish, and in five years’ time, we are going to have more digitisation, more AI integration – not less, then think in systems.
Scrape every learning possible from the existing connection process and really commit and build your own private substation, with behind the meter storage and a gas-fired power station, while you wait for the grid to build a significant amount of new generation. The regulator is going to make you spend more for generation and storage regardless, why not do it on your own terms, rather than giving your competitors an edge?
Are you funding a ticket or a system?
For the investor, the implications are clear. The mandate to fully offset demand is a forced bid for firming and generation and co-location land.
For example, a 100 MW data centre forced to ‘fully offset’ its demand faces roughly $794 million - $1.2 billion in generation and storage capex – which runs to 50% of the facility’s own build cost – and none of it appears in the connection agreement.
The owners who can do that re-rate, the holders of a connection agreement or who are still in the queue carry an offset bill few have quantified. And while NSW and Victoria argue about it, Queensland didn’t sign.
Not investment advice. If you would like to chat further, I can be contacted on info@followthebottleneck.com