The AI boom is here. Once confined to the walls of academia, AI now has potential in virtually every sector of the economy. But its ever-increasing presence poses serious challenges for Australia’s energy transition.
[Nathan is currently in his second year of a Bachelor of Engineering and a Bachelor of Commerce degree at Monash University, specialising in Robotics and Mechatronics Engineering. He is fascinated by AI both as a technical accomplishment as well for its economic, social, and environmental implications into the future, and hopes to combine his interests in writing and economics to bring those issues to a wider audience.]
Because beneath the rosy glow of generated images, instant cover letters, and frighteningly easy code refactoring, lies an uncomfortable reality: AI requires energy. Lots of it. So is Australia’s grid ready for the AI era?
Hungry for energy
In 2025, the International Energy Agency (IEA) published a report analysing the consequences of the AI revolution for energy demand, and, by extension, policy makers (Spencer & Singh, 2025). The impetus for this report was clear; improvements in computing power, greater availability of data, and breakthroughs in the field of deep neural networks have enabled the development of increasingly complex, and capable, AI models. The IEA estimates that the computational power required to train AI models has increased by a factor of 350,000 since 2014. An even more sobering figure is that modern models consist of as many as 1 trillion weights (parameters finetuned during training to improve output).
Training and deploying such goliath models happens in data centres.These facilities house servers, storage systems, networking equipment, and, just as importantly, a cooling system that stops the equipment from overheating due to the raw computational power required. Today, data centres consume about 2% of the electricity in the national grid; this figure is predicted to grow to 12% by 2050, totalling 33.8 TWh (terawatt-hours) of electricity overall per year (Oxford Economics, 2025). (For reference, a household uses between 4000 to 9000 kWh of electricity per year.) And The Clean Energy Finance Corporation (CEFC) predicts that without additional renewable energy production, the increased demand could raise power prices in New South Wales and Victoria by 26% and 23% by 2035 (CEFC, 2025).
Australia’s data centre future
The projected rise in data centre electricity demand stems from Australia’s increasing prominence as a global destination for AI investment (Macdonald-Smith & Cropp, 2026). Amazon has already pledged $20 billion AUD to expand data structure infrastructure in Australia from 2025 to 2029 (Amazon News, 2025), while in 2024, Blackstone acquired AirTrunk, an Australian company considered the leading data centre provider in the Asia Pacific region, for $24 billion (Blackstone, 2024). These commitments signal global confidence in Australia’s AI potential and infrastructure, spurred on by our geographic location, regulatory framework, and rich sources of renewable energy (CSIRO, 2025).
The renewables conundrum
However, some–not least Larry Fink, CEO of BlackRock–are concerned that renewable energy alone “can’t reliably keep the lights on” (Fink, 2025). Solar and wind energy are intermittent, and this is particularly problematic for data centres because they require a constant, round-the-clock power supply. So how will data centre growth be supported even as coal-fired power plants will all be retired by 2049?
The obvious option is to keep non-renewables in the energy mix. The Australian Energy Market Operator’s (AEMO) draft 2026 Integrated System Plan highlights the need for 14 GW of gas-powered electricity by 2050 to back up renewables even as today’s gas-powered generation is reaching end of life (AEMO, 2025). Crucially, new gas storage and storage infrastructure has to be developed, along with development projects that address potential structural supply gaps. It has also been suggested that the energy mix could be further propped up by Small Modular Nuclear Reactors (SMRs) , with this diversification of energy generation facilitating the transition to renewables while consistent baseload power keeps overall energy prices low (Danne, 2026). But considering that nuclear power is not even legal yet, it is likely that increased energy demand will come before Australia’s first nuclear power plant.
Emerging solutions
Others more optimistic about a 100% renewables future place their faith in the development of Battery Energy Storage Solutions, or BESS (Amjad, 2026). Batteries directly address the intermittency issue of renewable energies by storing excess energy on, for example, sunny and windy days, and releasing that energy to the grid during cloudy and still days. Government subsidies can further boost BESS adoption by encouraging the growth of data centres clustered around BESS and renewable energy projects, making the green option more cost competitive. And global BESS prices have continued to fall recently (Colthorpe, 2025), with global energy think tank Ember claiming that “dispatchable solar [is now] economically viable” (Rangelova & Jones, 2025). Additional energy storage solutions, such as pumped hydro and thermal energy storage, are currently undergoing research and development and could provide further storage capacity (Clean Energy Council, 2025).
Another potential avenue is to mandate that data centre investment be accompanied by further investment in renewable energies, a principle likely to form part of Australia’s national data centre principles (Department of Industry, Science and Resources, 2025). Jointly located data centres and renewable energy production are likely to reduce strain on the entire energy grid and keep power prices from ballooning for households (Westpac Institutional Bank, 2025). This route could be combined with requiring data centres to set Power Usage Effectiveness (PUE) targets to improve energy efficiency, an initiative that has already seen some success in China and the European Union (Lim, 2025).
Conclusion
As the AI era arrives, so do the voracious data centres that facilitate its ever-increasing scope and capability. At the same time, Australia’s transition to renewables looks just as unstoppable. What’s clear is that planning the future of Australia’s national energy grid must take into account the inevitable explosion of data centre activity as Australia looks to cement itself as a regional data centre hub. Without it, the immense possibilities of the AI boom will slip away.
References
Amazon News. (2025, June 14). Amazon investing AU$20 billion to expand data center infrastructure in Australia and strengthen the nation’s AI future. https://www.aboutamazon.com/news/aws/amazon-data-center-investment-in-australia
Amjad, H. (2026, February 5). Policy, not tech, is stalling sustainable data centres. The Interpreter. https://www.lowyinstitute.org/the-interpreter/policy-not-tech-stalling-sustainable-data-centres
Australian Energy Market Operator. (2025, December 10). Draft 2026 Integrated System Plan. https://www.aemo.com.au/-/media/files/major-publications/isp/draft-2026/draft-2026-integrated-system-plan.pdf?rev=8e38a5150ec2474791ee573a9981f07c&sc_lang=en
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