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Australia’s AI and cloud-infrastructure boom continues to accelerate, with dozens of new mammoth data centres planned across Sydney, Melbourne and other metros. These facilities support high-performance computing, AI workloads, cloud services, streaming and other digital infrastructure, but they come with a growing, less visible demand: water.

This week, water utilities' warnings have drawn public and regulatory attention to the mounting challenge of balancing data-centre growth and water supply. 

Why Water Matters for Data Centres

While data centres are better known for their power demand, water is the second major input, used for cooling server farms, reducing heat output, and ensuring hardware runs reliably. Traditional cooling methods often rely on evaporative or chiller-based systems that consume vast volumes of water, especially during hot/dry periods. 

As demand for computing (especially AI) surges, the pressure on the water supply follows. For instance, in Sydney alone, water-utility projections indicate that by 2035, data centres could consume up to 25% of the city’s annual drinking-water supply if growth continues unchecked.

Current Situation in Australia

• Recent approvals for data-centre projects in NSW (including proposals by major global operators) rely on general assurances around “water minimisation,” rather than enforceable, measurable water-use or reduction targets.
• Together, approved centres could demand nearly 10 gigalitres of water annually, equivalent to nearly 2% of Sydney’s maximum potable-water supply.
• If all proposed growth proceeds without stronger water controls, demand could swell to ~135 gigalitres by 2035, roughly a quarter of Sydney’s available supply under some forecasts.
• In Melbourne’s west and north, public water authorities have flagged that cluster proposals could draw tens of gigalitres per year, amounting to the annual usage of hundreds of thousands of households.

In short, the data-centre boom is outpacing the water-planning frameworks. Much of it remains built on “vague water plans” rather than real constraints. 

Emerging Responses

Given the stakes — competition with residential water use, pressure on utilities, and community / environmental impact — developers and regulators are beginning to respond:

• Some facility operators are shifting toward closed-loop chiller systems, liquid-to-chip cooling, and direct immersion cooling, approaches significantly more water-efficient than traditional evaporative cooling.
• There's growing emphasis on using recycled water, treated wastewater or stormwater, instead of potable drinking water, for cooling and cooling-tower make-up.
• Global analysis (and local pressure) is prompting calls for mandatory water-use disclosure and minimum water-efficiency standards for data-centre approvals, not just energy-related metrics.

The shift is not just technical, it’s also regulatory and social. As more people become aware of the water cost of digital infrastructure, projects without sustainable water plans risk delays or even rejection.

What This Means for Investors, Developers and Policymakers

Risk Side: For Data-Centre Developers & Investors

• Projects relying on standard cooling and potable water may face stricter permitting, higher compliance costs, or rejection, especially in water-stressed or high-growth urban zones.
• As water becomes a bottleneck resource, operating costs may rise (e.g. need to secure recycled water, build alternative supply infrastructure).
• Risk of “stranded water assets”, expensive builds that become unviable if regulations tighten or water scarcity deepens.

Opportunity Side: For Tech, Infrastructure, and Service Providers

• Firms specialising in water-efficient cooling technologies (liquid-to-chip, immersion, closed-loop, hybrid systems) stand to gain demand growth.
• Water recycling, wastewater treatment and industrial water supply infrastructure may become attractive investments as data-centre clusters push utilities to upgrade infrastructure.
• Regulators & utilities may require pre-funded water-supply upgrades or infrastructure charges on developers, creating a new infrastructure-finance and services opportunity for investors. 

The BPC View

Australia’s emergence as an AI and data-centre hub represents a significant long-term economic opportunity, but the water footprint of this expansion is a material constraint that investors can no longer ignore.

Digital real estate is now about more than power and fibre. Water security and cooling efficiency are becoming critical determinants of project viability, regulatory approval, cost base and social licence.

For investors, developers and policymakers, the implications are clear:

• Water-use risk must be explicitly modelled in infrastructure planning and capital-market valuations.
• Developers that integrate recycled water, advanced cooling systems and transparent efficiency metrics are likely to gain faster approvals and command stronger investor confidence.
• Projects that fail to adapt may face delays, re-scoping or elevated long-term operating costs, particularly in constrained metropolitan corridors.

As AI-driven demand continues to rise, the resilience of Australia’s digital infrastructure ecosystem will depend on how effectively the sector internalises and mitigates its water requirements. Those who plan with foresight will be best positioned in the next phase of growth.

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