Melbourne is turning ‘rust-bucket’ suburbs into a thirsty, power-hungry billion-dollar data empire

Melbourne has surged ahead of Sydney for the first time in the multibillion-dollar race for planned new data centres, as the state capitalises on old manufacturing land to attract the world’s tech giants.

But this unprecedented surge in projects, reshaping suburbs in Melbourne’s west and north-west, has sparked concerns about the impact of these power-hungry facilities on the state’s electricity and water supply.

Economic Growth Minister Danny Pearson told The Age the government wanted to accelerate planning processes to bring more data centres to the state, with cheaper land availability giving Melbourne the upper hand over Sydney.

He said much of the state’s vacant industrial land, a legacy of the manufacturing boom, already had good utility access, positioning Victoria well for the data centre industry fuelled by the artificial intelligence explosion.

“Thirty-five years ago we were seen as the rust-bucket state – as the tariff laws came down, a lot of those industries were no longer viable and shut up shop,” he said.

“I think there’s an opportunity now to have that land repurposed for data centres.”

Pearson said the state currently had about 48 operational data centres, with 20 more yet to come online. These range from massive “hyperscale” facilities built by technology giants like Amazon to smaller “colocated” centres where businesses rent space. Among the most recent to be announced is a $2 billion facility in Fishermans Bend.

Data centres are becoming more prolific due to the explosive growth in cloud computing and artificial intelligence tools such as ChatGPT. They look like large industrial warehouses – sometimes tens of thousands of square metres – and house the servers and storage needed to process and manage these vast amounts of data.

Melbourne Water has warned it is receiving applications from new hyperscale data centres, which use large amounts of water to cool servers, with water demands “exceeding those of nearly all top 30 non-residential customers” in the city.

In its 2026 water pricing submission, the utility stated this sudden, massive demand had not been accounted for in its demand forecasts or expenditure planning.

The authority said it would be “prudent” to collect “upfront capital contributions” from these new customers for any infrastructure upgrades, so the financial burden does not fall on the broader customer base.

The strain on the electricity grid is also projected to be significant. The Australian Energy Market Operator (AEMO) estimates that by 2030, 8 per cent of Melbourne’s grid will be used by data centres, up from 2 per cent this year. By 2050, AEMO predicts 19 per cent of the city’s energy consumption will come from data centres.

Johanna Lim, a researcher at the United States Studies Centre, said the power-hungry nature of data centres created a major problem for Australia.

Lim said while the grid could accommodate current demand, capacity problems would begin to emerge as rapid expansion continued. She said avoiding energy constraints required stronger co-ordination between utilities and data centres, as well as the acceleration of renewable energy projects.

However, she noted data centres could also help stabilise the grid by absorbing excess renewable energy at times of the day when supply exceeds demand.

Data from real estate firm Cushman & Wakefield shows that as of June, Sydney has more than double Melbourne’s current capacity. However, for the first time, Melbourne now has a greater pipeline of planned capacity for projects where construction is yet to begin.

Despite the stronger growth, Cushman & Wakefield said it was unlikely that Melbourne would become the top data centre market in Australia due to Sydney’s position as the business capital, and other factors such as submarine cable connectivity.

Research from Colliers shows demand is outstripping supply, with Melbourne’s vacancy rates the lowest in the region and almost 100 per cent of the new pipeline already pre-committed.

A data centre boom would create thousands of short-term construction jobs and billions in economic activity, followed by a smaller, ongoing workforce of skilled technicians to operate the new facilities.

Josh Maitland, Colliers Urban Planning director, said Melbourne was “out-competing Sydney at present” due to “advantages in ready land supply, power availability ... and faster planning approval processes.”

He warned that failing to meet demand locally would mean demand will be satisfied overseas.

“This harms the Australian tech sector ... More importantly, relying on overseas capacity undermines Australia’s data sovereignty,” he said.

Bronwyn Cumbo, a social researcher and lecturer at University of Technology Sydney, said residents close to new hyperscale data centres were not being consulted adequately, as many projects were approved directly by state governments.

She said the facilities could be noisy, obtrusive, strain local resources, and lead to increases in land values.

“They bring in a lot of money and investment ... I just think at the moment there needs to be a more balanced consideration about what a sustainable and inclusive data centre future looks like,” she said.

The state government said water corporations were engaging with data centres to understand their infrastructure needs and exploring the option of recycled water.

Pearson said now was Victoria’s “moment” and a crucial time to establish the state as a technology hub and centre of excellence.

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