‘Speculative’ surge: The $260m fight over western Melbourne’s AI boom

A multibillion dollar surge in data centre proposals across Melbourne’s north-west has triggered a high-stakes stand-off over the bill for the expected power grid overhaul required to run the energy hungry developments.

Jemena, which own the area’s poles and wires infrastructure, is locked in a $260 million tug-of-war with the federal regulator over how much it can spend, and then recoup from customers, to upgrade the network so it can cope with the extra demand.

Jemena had argued it should have approval to collect about $2 billion in revenue, in today’s dollars, from customers over the five years to 2031 as it handled an expected doubling in demand, the highest growth of any Victorian distribution company.

This was a 25 per cent increase on the amount it was allowed to take in the current period, which it said would be funded by the burgeoning growth in data centres and residential customers switching from gas to electricity.

But in its draft determination, the Australian Energy Regulator (AER) suggested it needed only $1.7 billion in revenue after casting doubts on staggering predictions of data centre growth in the area.

The regulator’s draft decision, backed by an independent review from consultants Baringa, characterised Jemena’s demand forecasts for 2026-31 as “overstated”, “subjective”, and “lacking in transparency”.

It is concerned that residents could foot the bill for unnecessary works if the predicted data centres never come to fruition.

Even as the Allan government publicly and aggressively courts data centres, including through fast-tracked approvals that resulted in a $1 billion centre approved in 75 days, Energy Minister Lily D’Ambrosio has sided with the regulator.

“Our focus is on making energy affordable for Victorians, and we support the AER in scrutinising expenditure plans made by private energy companies to ensure they deliver value for households and businesses across the state,” she said.

The stoush could also be replicated in other parts of Victoria as the operators of the grid, already juggling a difficult transition from fossil fuels, attempt to cope with a major new disruption.

The regulator has already made similar decisions citing speculative assumptions for electricity providers servicing other parts of the state, reducing expenditure on data centres for AusNet, Powercor and CitiPower.

Jemena, which services 380,000 customers in Melbourne’s north-western corridor, claims that electricity demand will double by 2031, driven by a 4.1 gigawatt pipeline of data centre inquiries – a figure which represents half of the entire state’s peak energy demand.

The boom is transforming the city’s north-west, with abandoned industrial sites in West Footscray, Brooklyn, Tullamarine and Truganina now the focus of multibillions of dollars worth of proposals, many of which remain confidential but are included in electricity companies’ plans.

Jemena warned that if the regulator did not approve its revised spending plans, it could have real impacts on customers, risking more frequent and longer outages.

“We do not agree with several aspects of the AER’s decision and believe the regulatory allowance provided is insufficient for operating and investing in the electricity distribution network to meet the expectations of our customers,” it told the regulator in January.

“It also risks delays to connections (which may need to wait until sufficient capacity is installed and available) risking economic development and housing supply in our network area.”

Distribution networks like Jemena operate under a revenue cap, meaning they are legally entitled to recover a set amount of profit from their customer base regardless of how much energy is actually delivered.

“Stakeholders have highlighted the degree of uncertainty and risk around the demand forecasts proposed by Jemena, noting that if actual energy delivered … is less than forecast, distribution network tariffs and consumer bills would be higher, all else being equal,” the regulator said in its decision.

This means if the AI boom predicted by Jemena, and the other power companies, fizzles out and the predicted data centres are never delivered, everyday consumers could be left to pick up the tab to ensure the energy giant hits its government-approved profit targets.

Jemena noted that its current “in-flight” connections – projects with signed contracts – already total 1393 megawatts, a figure it says is significant compared to the total capacity installed in Sydney and Melbourne over the last decade.

After revising its methodology to include only committed or highly likely data centre requests in its updated proposal, Jemena said there would still be more than 3.2 gigawatts – more than a third of the state’s current peak demand and enough electricity to power millions of homes.

Often described as the physical factories of the internet, data centres are industrial warehouses containing thousands of high-powered computers that store and process the data behind everything from video streaming, cloud storage to artificial intelligence tools like ChatGPT. Victoria is aggressively courting them as a cornerstone of the state’s future digital economy.

D’Ambrosio told the regulator that the government also had concerns about the distribution companies’ predictions on data centre growth that translated to broader concerns around the accuracy of their “demand forecasts and risks of over-estimating demand growth”.

Bruce Mountain, director of the Victoria Energy Policy Centre, said infrastructure upgrades should only be green-lit when projects were committed and that data centres should be held financially responsible if they failed to meet their forecasts for electricity demand.

Jemena maintains that the sheer volume of new industrial customers could actually lower costs for everyone by spreading fixed costs across more users.

“Our revised proposal includes a $94 reduction in Jemena’s distribution charges for a typical residential customer, subject to the proposal being endorsed by the AER,” spokesperson Michael Pintabona said.

The regulator is due to make a final decision on Jemena’s revised proposal in April, and a spokesperson said it aimed to ensure consumers paid no more than necessary for safe and reliable energy while supporting an evolving energy market.

“Data centres must pay the costs associated with connecting to the distribution network. This includes both the direct cost of connection that is only used by the data centre and some portion of the shared distribution network costs,” they said.

“As there is considerable uncertainty around how many data centres will connect to networks in future, which determines the required investment in the shared network, we asked Jemena to provide more information to support the number of data centres it proposes to connect to its network.”

Data Centres Australia chief executive Belinda Dennett said the industry required more reliable data on the development pipeline, noting that the lobby group’s own projections for energy usage were significantly more conservative than current government estimates.

“Our credible data, sourced from a top independent analyst, shows Melbourne will grow from its current 0.4 gigawatts to nearly 1.2 gigawatts by 2030,” Dennett said.

However, she warned there was a bottleneck of energy connections in Melbourne’s north-west – the city’s primary data centre hub – and called for substation upgrades to be fast-tracked to keep pace with demand.

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