By Byron Kaye and Stella Qiu
SYDNEY, July 23 (Reuters) – Developers of a massive data centre OpenAI wants to build in Australia have abandoned plans to cool it with recycled water, switching to a more energy-intensive method that undercuts government efforts to curb the booming sector’s drain on resources.
The 612-megawatt S7 facility, which would be one of the world’s biggest, had hoped to tap Sydney’s treated sewage to chill the servers without dipping into drinking water or drawing more heavily from the energy grid, planning documents lodged in April showed.
But it walked away from talks with utilities due to lack of planning permission to build a pipeline that would be needed to ship the recycled water, the ChatGPT-maker’s Australian partner, NEXTDC, told Reuters.
“Recycled water … has real merit and it can support lower PUE and better overall sustainability and NEXTDC considers it wherever that infrastructure exists,” CEO Craig Scroggie said in an email. PUE, or power usage effectiveness, is a closely watched metric of energy used for cooling and other overheads beyond computing.
“Potential sources were canvassed in early planning. In Western Sydney, the enabling infrastructure … is not yet in place,” Scroggie added.
The decision, reported for the first time, highlights a challenge for authorities around the world as they vie for a slice of an AI construction frenzy that economists say will top $1 trillion in Asia by 2030: community pushback is pressuring them to set sustainability rules that existing infrastructure cannot easily accommodate.
HOW TO BE COOL?
Cooling is a major part of the planning puzzle, and data centre developers typically choose between misted water or fans powered by electricity.
Pressure to limit data centre water usage is especially strong in Australia, the driest inhabited continent, where residents sometimes face water restrictions in drought. NEXTDC says it does not plan to use any drinking water for the S7 project.
The energy grid operator for Sydney meanwhile says it is at capacity due to data centre connection requests.
For the centre that OpenAI wants to help plan, build, run and buy computer processing from, NEXTDC said it will now circulate liquid coolant around the chips to extract heat which would be fanned away, a process experts said uses no water but more energy.
“If we take the current situation at face value it will be more energy intensive, so NEXTDC will have to address these concerns,” said Sarvaesh Mohan, an analyst at data centre consultant DCByte.
The developers’ inability to ship recycled water illustrated “the wider gap between the current AI infrastructure boom and the slower deployment cycles of local utilities”, he added.
NEXTDC declined to comment on whether the new cooling method would consume more energy, while an OpenAI spokesperson referred questions about the development’s cooling design and infrastructure to NEXTDC.
A spokesperson for Transgrid, the pension fund-owned grid operator for Sydney, said the company had “limited capacity to connect new large data centres to the transmission network in Sydney without augmenting the bulk network”, and data centres would need to fund the expansion.
In May, Transgrid Executive General Manager Jason Krstanoski told an ongoing New South Wales state parliament inquiry that “existing regulatory arrangements were not designed for this level of large, clustered load growth”.
Sydney Water, a government-owned utility named in planning documents as a possible supplier of recycled water for the OpenAI-NextDC project, didn’t respond to a question about the developer’s decision to cancel the talks.
Kurt Dahl, CEO of privately owned recycled water company coNEXA, which was also named as a possible supplier, declined to comment on the decision.
Hooking up data centres with recycled water should be treated “with urgency, as data centres are currently making long-term choices between energy and water for their preferred approach for cooling”, he said.
RULES ARE RUNNING TO CATCH UP
Amid growing concern that echoes anti-data centre protests around the world, the Australian government this month said it would impose energy and water use limits on data centre developments among other AI guardrails.
But that trails some Australian state government measures, highlighting the piecemeal policies regarding the fast-growing industry.
A Reuters review of 35 data centre applications being considered by or approved by New South Wales found authorities have since late 2025 started demanding data centre developers give water usage figures while imposing a fixed limit on PUE, the power usage measure.
One of six data centre projects to face the new state-based rules was the OpenAI-NEXTDC facility, the review found. It must commit to a fixed PUE limit and specify how much water it will use to clear the new hurdles, the documents showed. NEXTDC didn’t give a target PUE for S7. The new state-imposed limit of 1.3 is at the lower end of global averages.
The Australian company said it had deployed the waterless cooling method elsewhere but declined to specify at what scale. In a 2025 sustainability report, the company said it had successfully used the system to cool 50 megawatts of computing power, one-twelfth the amount proposed in the OpenAI project.
David Pocock, an independent senator who has raised concern about data centre developments, said the new federal laws must include mandatory requirements for “local sovereign compute power access, water usage, renewable energy as well as appropriate planning controls to ensure they aren’t using land better used for housing or creating adverse living conditions for existing communities”.
(Reporting by Byron Kaye and Stella Qiu; Editing by Lincoln Feast.)
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