Data centres may be required to “turn-down” or be cut off from the grid by the Australian Energy Regulator if they fail to show sufficient firmed supply contracts, if a rule change requested by climate change and energy minister Chris Bowen is approved.
Bowen’s requests for electricity market rule changes were posted on the website of the Australian Energy Market Commission on Wednesday (here and here).
The Albanese government flagged its plans to regulate the soaring investment in data centres in July, including requiring the new load centres pay for their impacts on electricity networks and where possible bring their own renewable energy.
Both Queensland and the Northern Territory governments have claimed to have carve-outs from the renewables requirement provided they can show power prices won’t be increased, using alternative coal- or gas-fired power plants.
The scale of the additional expected load “may create risks for reliability, system security and wholesale prices unless supported by sufficient generation, storage and dependable demand flexibility”, the rule change request states.
It cited the 2026 Electricity Statement of Opportunities issued by the Australian Energy Market Operator that identified 225 data centre projects under development, with a combined capacity of 67 gigawatts. For context, Bowen noted in August that the present generation capacity of the National Electricity Market is about 77 GW.
The request also noted that while not all proposed projects will proceed, or operate at rated capacity, data centres can be developed more quickly than traditional, industrial large loads and the delivery of new generation, storage and network capacity.
“This timing mismatch may be particularly significant if large data centre developments proceed in locations with limited network or supply capacity,” it said.
To address these issues, “qualifying” data centres covered by the proposed rule change would be required to have in place “eligible firming arrangements that reflect the scale and profile of their electricity demand”, Bowen’s request states.
“By linking new data centre demand to new generation and storage, supplemented by dependable demand flexibility, the obligation would reduce the risk that reliability and price impacts are transferred to other consumers,” it said.
The sting in the request is the proposal to grant enforcement powers to the AER to deal with data centres that “fails to demonstrate sufficient firm contract coverage” for several compliance assessment points.
“Financial penalties would serve as a primary enforcement mechanism, with penalties set using the AER’s existing compliance and enforcement framework,” the request states. “However, further design considerations are required to determine how penalties would accrue, including whether they should apply on a daily, monthly, or other basis.”
And more pointedly, should financial penalties alone prove “an adequate disincentive for non-compliance”, the AER’s powers could be complemented by a “turn-down” or load-shedding penalty.
“Under this approach, a non-compliant data centre could be required to reduce its demand until it demonstrates sufficient firm contract coverage as required by the obligation,” it stated, adding that AEMO might share in the enforcement role.
An instance of when data centres might be required to respond could be during a Lack of Reserve (LOR) or Minimum System Load (MSL) event. “This would be intended to ensure demand response is available when the system needs it most, but it may be more complex to implement and administer.”
In a nod to industry concerns that data centres might be providing indispensable support – such as to air-traffic controllers or hospitals – the rule change request calls for any form of load shedding “to be coordinated with state requirements, particularly where data centres provide ‘essential’ services to the state”
Methods to demonstrate a data centre’s firmness, it may have present a portfolio of electricity derivative contracts – such as power purchase agreements, cap contracts, and tolling agreements – sold by operators of physical generation and storage located within the same region as the data centre.
These contracts would be in addition to “dependable demand flexibility including behind-the-meter resources such as storage and demand response capabilities”.
“A data centre’s firm contract coverage and behind-the-meter resources would be assessed based on its portfolio of firm contracts as a whole, rather than on the firmness of individual contracts or resources,” the request noted.
“For example, if multiple solar power purchase agreements are signed, the delivery risk may be higher than a diverse portfolio of contract/resource types,” it stated.
As AEMC’s chair Anna Collyer noted earlier this month, data centre buildout may precede new generation and firming capacity.
The rule change request suggests states would play a key role. “Enabling Ministers to have the capacity to set the level of newness and technologies for their jurisdictions would help to ensure the firming being brought in meets the needs of their jurisdiction.”
Still, the AEMC would be waiting in the wings to ensure jurisdictions don’t expose their regions excessively.
So, while a “core element” of the proposed design is for new generation to be located in the same region as the data centre is located, there may be instances where a jurisdiction might relax this design constraint such as after an investment in an interconnector to a neighbouring region.
“The AEMC may seek to consider whether allowing this flexibility is appropriate, and if it would create any unintended consequences,” the rule change request noted.
“Further consideration may be required to ensure that having a NEM-wide level of firmness, and variations between jurisdictions for ‘newness’ and technologies, does not create any unintended consequences for jurisdictions,” it stated
The definition of what counts as “new” capacity will also need to be confirmed.
“One option for defining ‘new’ is based on when the underlying asset has reached a final investment decision
(FID) or financial close (FC), as this will help to ensure that the investment is additional,” it noted.
The rule change request also recognises that the time it takes to implement the adjustments could prompt some to developers to postpone decisions to invest in firming plant until after rule comes into operation.
“The AEMC should consider this risk and the potential mitigations available, which could include setting a transition period before the rule commences where plant reaching FID would still be eligible,” it noted.
Any transition period, though, should be time bound. “Additionally, the AEMC should consider any other measures that will help
to ensure that investments required under the scheme are bankable, including possibly requiring minimum tenure of firming contracts,” it stated.
The rule change request also takes into account the prospect of sourcing new investments in firming through the
proposed Electricity Services Entry Mechanism (ESEM) that is intended to come into effect after 2030.
The challenge, here, though is that this mechanism is yet to be legislated, it said.
“The jurisdictional working group progressing the ESEM may consider how data centres are treated in the final design,” it states. “The AEMC could consider any opportunities to leverage the ESEM following a decision to legislate the mechanism.”
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context:
The system impacts of these demand characteristics need to be considered as the NEM
transitions to a higher share of weather-dependent VRE as ageing coal-fired generation
retires. Maintaining reliability will require sufficient generation, storage and dependable
demand flexibility to be delivered as demand grows. If supporting capacity does not keep
pace with data centre demand, periods of tight supply may become more frequent,
increasing reliability risks, load shedding, or placing upward pressure on wholesale
prices.
Coverage: which data centres should be subject to the obligation and which entity
should be responsible for meeting it.
Demonstrating and assessing firmness: how contracts, generation, storage and
demand flexibility should be assessed against a data centre’s demand profile
Incentivising new investment: how the obligation should ensure that eligible
contracts are underpinned by new generation and storage.
Compliance and enforcement: how compliance under the policy will be
implemented.
The obligation could apply to data centres exceeding a certain size threshold or
operational profile, with the objective of minimising reliability and affordability impacts of
data centres on consumers. Consideration is required around whether the obligation
should be tiered based on the size of the data centre, with larger data centres facing
higher firming requirements than smaller data centres. Introducing tiering may allow for
more efficient accounting of the different types and capabilities of data centres and
address the proportionality of impact.
Electricity demand from data centres is expected to have a significant impact on the
NEM. The 2026 Electricity Statement of Opportunities (ESOO) forecasts data centre
consumption to increase to around 15 TWh or 7.8 per cent of operational consumption by
2029-30 and then to approximately 34 TWh or 13 per cent by 2035-36.1 This is nearly equivalent to the 2025-26 household electricity demand across New South Wales and
Victoria (38 TWh). 2 This growth will occur alongside other significant sources of load
growth, including the electrification of commercial and industrial processes and the
decarbonisation of transport.
At the same time Australia’s electricity system is transforming. Retiring coal fired power
stations are being replaced with variable renewable energy (VRE) and short and long
duration storage. In the absence of appropriate arrangements, the costs and risks
associated with meeting data centre demand could be borne by consumers.
The proposed rule change amends the National Electricity Rules (NER) to require
qualifying data centres to manage the potential reliability and price impacts of their
demand through appropriate contracting arrangements and demand flexibility.
This rule change request seeks to ensure, where possible, all data centres over a
threshold size have a net positive impact on system security, reliability and affordability
by:
Introducing a minimum, mandatory contracting obligation that adequately covers
a data centres’ demand load shape and profile.
Bringing forward investment in new renewable generation, storage and demand
flexibility, located in the same jurisdiction as the data centre, by establishing
standards and guidelines in relation to the characteristics of the types and
categories of technologies that data centres contract with under the obligation.
in aemc letter, Bowen says
As data centre connections increase, networks supporting urban hubs are rapidly becoming
constrained. For example, Transgrid has experienced an unprecedented increase in
enquiries from connection proponents in Western Sydney and is now in advanced talks to
connect 8 GW of data centre load to the grid. This is on par with the entire average daily
demand for NSW between 7.5 GW and 10 GW. Plans for future network augmentation are
accelerating to meet this growth, with the Project Assessment Draft Report (PADR) for
Sydney Ring South noting that the project will be needed three years earlier than previously
anticipated due to load growth associated with data centres. Accelerating this project is
anticipated to cost an additional $1b in net present terms.
context
Australia already has an established and growing data centre industry, with more than 250
data centres in planning, development or operation. The surge in data centre investment is
happening at the same time as we rapidly expand and transform our electricity systems to
transition to net zero.
Data centre loads are expected to increase significantly over the next 5-10 years. Rapid and
substantial growth in electricity demand from data centres and the deployment of artificial
intelligence creates risks to our electricity system that need to be carefully managed,
particularly given the uncertainty regarding the pace and scale of demand growth.
The Australian Energy Market Operator’s (AEMO) Step Change scenario in the
2026 Integrated System Plan forecasts data centre load will roughly triple by 2030, to 6% of electricity consumption of the National Electricity Market (NEM) with potential for larger
growth. This forecasted energy demand is enough to power around 2.1 million homes.
In Victoria, the 2025 Victorian Annual Planning Report highlights the significant network
augmentation that will be required to facilitate many of the proposed data centre
connections AEMO has received. AEMO Victorian Planning received over 18 GW of large load
connection enquiries that largely related to data centres in metropolitan Melbourne areas.
Although many of these applications are not expected to proceed, new data centre load is
expected to trigger significant augmentation costs due to existing network limitations in the
Melbourne area.
For NSW, the 2025 Transmission Annual Planning Report (TAPR) highlights that data centre
growth is a key driver of emerging transmission constraints, requiring major augmentation
to maintain system reliability. The TAPR outlines a number of projects that are being
assessed to accommodate the rapid growth of data centre loads. Transgrid’s forecast, of
data centre demand over the next 10 years increasing 20-fold relative to the 2024 TAPR, is
indicative of the significant upstream augmentations that may be required.
Peter Hannam
Peter Hannam is a veteran journalist whose work spans almost four decades and includes stints outside Australia, including time in China, Japan, Singapore and Mongolia. He has lately reported extensively on energy, climate and environmental issues in Australia, and also worked for the federal Climate Change Authority as a special media advisor.
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