What can Australia adopt from the United States data centre build out?
In the lead up to the promised NSW Data centre strategy, this article explores policy directions adopted in the United States data centre build out, what could be applied to the NEM, and what it means for investors.
Australian federal and state governments data centre policy responses have focused on land-first planning acceleration pathways and framing the data centre conversation as ‘sharing the benefits’. A sharp contrast to the United States which frames the data centre build out as ‘essential to national security, economic prosperity and scientific leadership.’1
Where is policy formation heading towards?
A jurisdiction offering accelerated planning is not necessarily the most helpful to getting a data centre energised. Just look at Sydney, the largest data centre hub in Australia with 90 data centres already operating, where the Investment Delivery Authority is now effectively moot followingTransgrid’s public letter to data centre proponents declaring there is limited grid capacity.
What is in motion is the Australian Government departmental executives working to enact Expectation 2 of the National AI Plan which requires data centres to:
“Secure new and additional clean energy generation and/or storage to offset demand
Cover their share of transmission and distribution infrastructure costs
Improve the overall security and stability of the energy grid, including by enhancing demand flexibility and opportunities for peak-load management”2
TNSPs are also being proactive, with Transgrid seeking a rule change that would see large load users, such as data centres, pay for their full connection capacity to the NSW grid regardless of whether they use all of it3.
‘Take or pay’ of contracted capacity regardless of use, is salve to the phantom-demand question and can help lower consumer cost, but it does not accelerate transmission build out.
The proposed rule change builds upon precedent in the United States. Drawing upon Halcyon’s analysis4 across 65 grid operator tariffs, the United States is moving towards the following five most common initiatives to reduce costs to consumers:
Minimum contract term lengths. For instance, Kentucky Power sets a 20-year minimum contract term for all new loads of 150MW+.
Minimum monthly billing demand. For instance, Indiana Michigan Power sets the minimum monthly billing demand as >80% of the capacity contracted by the customer.
Collateral requirements. For instance, Dominion Energy requires $1.5 million in collateral per MW of contracted capacity.
Exit fees. For instance, AEP Ohio allows the customer to terminate the contract for a fee equal to 36 months of minimum charges, but only after 5 years in the contract, and with 3 years of advance notice.
Capacity reassignment. For instance, Wheeling Power Company allows customers to reassign or reduce up to 20% of their contracted capacity without penalty under certain notice or term conditions.
The context of these tariffs is important as the United States energy market has cheap gas and clean firmed nuclear to co-locate, making it straightforward to solve for ‘bring your own generation’.
Australia’s response is instead, pay and wait for transmission.
What could data centres be advocating for instead?
Rather than land permits, it should shift towards a power-first policy response – which is the real unlock for getting a data centre built in Australia.
And, match the growing requirements for data centres to contribute with a genuine pro-investment framework.
Investors have significant influence in energy policy and they must begin to advocate for data centre and associated transmission and generation in Australia.
Let’s look at policy and funding mechanisms to accelerate transmission which draw upon United States response to the build out:
The so what for investors
Read the policy trajectory as a one-way ratchet on cost. The take-or-pay rule change, the offset mandate, and ‘cover your share of transmission’ need to be priced before a data centre draws a single megawatt. None of these policies move the date the megawatts arrive.
And for institutional investors, is the data centre offtake customer at last the right ‘shape’ for a genuine private transmission infrastructure proposition in the NEM? Could a hyperscaler vertically integrate or JV with an infrastructure fund or superannuation fund to deliver its own transmission build out?
Contestability is built into the National Electricity Market framework and the exploration of its ‘limits’ is surface level. The timing is opportune as incumbent Transmission Network Service Providers are genuinely stretched both planning for and executing major transmission projects to deliver the AEMO Integrated System Plan.
The United States is already adopting a hybrid approach with Pennsylvania Power & Light Electric Utilities and Blackstone Infrastructure creating a Joint Venture to build, own, and operate new electricity generation stations to power data centres in Pennsylvania under long-term services agreements (PPL 2025 Annual Report).
A contestable connection intersects the shared network; it does not create capacity upstream. So, the proposition works where network capacity already exists or is planned to be unlocked – such as the Hunter in NSW, the proposed VTP 2025 Truganina Terminal Station in Victoria or cutting into CopperString in Queensland.
I would privately be countering hard against the direction of data centre policy changes so government matches cost increases with ‘clearing a pathway’ and in parallel, re-running the analysis of which NEM jurisdiction offers the fastest path to megawatts.
If you would like to discuss further, I can be contacted by email: info@followthebottleneck.com.
Not investment advice. This article uses public information only and its content is general in nature.
Expectations of data centres and AI infrastructure developers | Department of Industry Science and Resources