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An unprecedented data centre boom is driving a surge in electricity demand that could force Victoria to rely more heavily on gas-fired generation, as domestic gas production plummets and key renewable projects face delays.
The escalating power requirements have raised questions over whether the state government’s planned renewable energy transition is compatible with its strategy to lure energy-hungry tech giants to Victoria.
According to the Australian Energy Market Operator’s latest forecasts, the power grid will require an extra four gigawatts of gas-powered generation capacity across Victoria and NSW over the coming decades to replace retiring coal plants, support household electrification, and “manage increased electricity demand from data centres”.
The operator – which has warned that new gas supply is needed to firm the grid during the renewable transition – said electricity demand from existing Victorian data centres almost doubled from 96 megawatts in the first quarter of 2025 to 187 megawatts in the first quarter of 2026.
The capacity crunch comes as local gas supply is forecast to fall by more than 50 per cent by 2030. While Victoria is moving households and businesses off gas and overall demand is decreasing, the state’s electricity grid will still rely on gas-fired generation to support the massive new power loads demanded by data centres.
The pressure is compounded by looming coal closures. EnergyAustralia’s Yallourn power station in the Latrobe Valley is due to shut in 2028 and AGL’s Loy Yang A is slated to close by 2035.
Fossil fuel companies are talking up the importance of gas. APA Group, the country’s largest gas pipeline operator and owner of Victoria’s transmission system, has told investors it expected strong ongoing demand for gas as coal is retired.
“We also know there will be significant additional gas demand from AI and data centres,” the company said in an ASX announcement in February.
Premier Jacinta Allan has championed the data sector, vowing to make Victoria the data centre capital of the country. This month’s state budget revealed commercial construction growth in Victoria was being driven entirely by data centres, with the government relying on the sector to support economic growth.
The rise in energy demand comes as Australia’s most advanced offshore wind project, Star of the South, off the Gippsland coast, released documents showing the project might not be fully operational until 2037. The Allan government has legislated offshore wind targets of at least two gigawatts by 2032 and four gigawatts by 2035.
Tennant Reed, director of climate change and energy at the Australian Industry Group, said most new demand would eventually be met by renewables backed by batteries, but warned the transition might not be smooth.
“In the United States, there have been a lot of data centre proposals which have pivoted to running on behind-the-meter gas generation, at least until they can complete a grid connection process,” Reed said.
“If that were to happen [here], that could increase gas demand quite significantly.”
Reed said a NSW proposal for a gas-powered data centre could add 20 petajoules a year to demand, which was a sizeable share of the east-coast demand of about 500 petajoules annually.
However, he said gas-fired power remained an expensive source of bulk energy and “not something you would choose if you had an alternative”.
Modelling by consulting firm Baringa for the Clean Energy Finance Corporation last year found data centre growth could increase Victorian wholesale electricity prices by 23 per cent by 2035 without additional renewable generation and storage. That is largely because of increased reliance on gas peaking plants, which are used during periods of high-energy demand or when renewable output is limited.
The global data centre boom is also straining supply chains needed to upgrade Victoria’s energy system. Waiting times for critical gas turbines are stretching to four years.
A spokesman for Energy Minister Lily D’Ambrosio said Victoria was on track to meet its 95 per cent renewable energy target by 2035, with gas and firming technology accounting for the remaining 5 per cent.
“We’re working with the Commonwealth to make sure that data centres invest in additional renewable generation and firming capacity to fully offset their electricity demand. This will avoid additional costs for households and businesses,” the spokesman said.
With Victoria to become a net gas importer by 2030, the state and federal governments have approved a new production licence for Amplitude Energy’s Annie gasfield in the Otway Basin to boost dwindling local supply. Victoria also launched a tender for new offshore exploration permits.
Opposition energy spokesman David Davis said the government had “declared war on gas” and Victoria was now suffering because it had blocked gas exploration for more than a decade.
“Data centres will require significant energy no doubt,” he said. “Much of it will be low-emission technology, but gas will likely play a significant role in firming.”
Analyst Johanna Lim, from the strategic technologies program at the United States Studies Centre, said gas would probably play a larger role in Victoria as data centre demand increased during periods of low renewable output.
“Gas is more flexible, fast-starting and reliable – which is especially important for data centres,” Lim said.
“Going offline for only a few minutes can mean data loss, service disruption and reputational damage.”
Greens leader Ellen Sandell said Labor was rolling out the red carpet to “power-hungry” data centres with no plan to power them without more gas and higher energy bills.
“These multinational tech corporations should be funding new renewables to power themselves, not leaving Victorians to foot the bill,” Sandell said.
The Australian Energy Market Operator has a long-term pipeline of Victorian connection requests totalling 18 gigawatts – double the state’s current maximum demand – though how many projects proceed remains unknown.
The operator’s latest quarterly National Electricity Market report said there were 1.5 gigawatts of data centre capacity at the application stage and another 0.7 gigawatts approved or under construction.
Lobby group Data Centres Australia said there was an operational capacity of 1.4 gigawatts, which is projected to increase to 3.2 gigawatts by 2030. It said the data centre industry was already one of the largest investors in renewable energy in Australia and contributed to grid stability.
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