Why data centre boom won’t help Australia with its productivity crisis yet

The value of emerging data centres to power artificial intelligence has quadrupled in just a year but this is unlikely to boost Australia’s weak productivity any time soon, a new report says.

Australia’s 33 data centre projects now have a combined value of $104 billion, up 300 per cent compared with a year earlier, Deloitte Access Economics revealed in its Investment Monitor report.

That’s on top of the 160 data centres now in operation, with half of them in Sydney.

The technology is regarded as a lifeline for Australia’s sluggish economic growth with weak productivity blamed for keeping inflation high as elevated costs are passed on to consumers.

But demand for scarce resources to build the productivity-enhancing data centres is set to become a bigger challenge, as renewable energy, defence and home building projects compete for labour and materials during a time of high construction costs.

“Together, data centres, energy infrastructure, housing and defence are drawing from overlapping pools of labour, materials and capital, meaning capacity constraints look set to continue to define Australia’s investment landscape for some time,” the report said.

“With productivity growth already weak, ensuring that capital flows to genuinely productivity-enhancing projects matters now more than ever.”

Nonetheless, big tech is expected to keep investing in data centres, especially in first-world economies like Australia, even in the face of local community opposition.

“The recent lift investment has further to run, particularly as global technology companies look to expand capacity in stable markets with reliable infrastructure, transparent regulation and access to renewable energy,” the report said.

While Australia’s productivity remains weak, new data centres are driving the investment boom, mainly with imported materials.

This is also underpinning demand for renewable energy, needed for data centres to exist without overwhelming established power grids still run on coal.

Data centres are legally required to underwrite their own power supply, leading to them making long-term deals with new renewable energy projects.

“The current environment is also proving hugely beneficial for the clean energy and utilities sector, pulled forward by two forces at once,” Deloitte Access Economics said.

“At the same time, the growth in data centre capacity is placing new and substantial demands on the power network, adding second, largely independent driver of investment in the sector.

“These changes could position data centres as a catalyst for the next wave of renewable investment, given that long-term power purchase agreements with wind and solar projects can give developers the certainty needed to finance new capacity.”

During the June quarter, IREN announced plans for a $10b 800-megawatt hyperscale data centre at Bundey, north-east of Adelaide, which locals fear will take too much water from the Murray River.

This occurred as Keppel Data Centres proposed a $10b 720MW project in Victoria’s Latrobe Valley, Energy North unveiled plans for an $11.9b Project Ares 1 gigawatt data centre in the Northern Territory and the Goodman Group announced plans for a $5B, 500MW Project Atlas data centre at Eastern Creek in western Sydney.

The capital figures cover building the shell along with substations and cooling systems but not the cost of servers or storage network equipment.

Australia’s economy grew by just 0.3 per cent during the March quarter as productivity fell by 0.6 per cent, reflecting an inability of firms to boost output from labour due to a lack of available technology.

But investment in plant and equipment spending soared by 16.3 per cent, marking the biggest increase in three decades.

Reserve Bank of Australia governor Michele Bullock this month blamed weak productivity for constraining the economy’s ability to grow without generating high inflation.