The Government Wanted AI Datacentres to Run on Clean Power. Two States Said No — and Won.
Anthony Albanese has backed down on a plan that would have forced states to power new AI datacentres using only renewable energy. He granted exemptions to Queensland and the Northern Territory after both refused to sign onto rules banning coal and gas from fuelling these new developments.
The backdown happened at a national cabinet meeting on 26 August 2026. Leaders agreed that jurisdictions with government-owned power systems and a surplus of fossil-fuel energy could be exempt. The renewable energy rule was supposed to be part of new federal laws expected in early 2027.
This is a big turnaround. Just three days earlier, on 23 August, the Albanese government was reported to be pushing ahead with national energy rules for AI datacentres that would override Queensland's opposition. Energy Minister Chris Bowen had previously vowed the Commonwealth would use its constitutional powers to force states into line.
Instead, the Prime Minister cut a deal. Northern Territory Chief Minister Lia Finocchiaro said she won approval to use gas from the Beetaloo Basin project to power datacentres. Queensland Premier David Crisafulli said his state should be allowed to use energy from its government-owned power networks. Crisafulli had been preparing to "firmly reject" the federal push, as reported by the Australian Financial Review the day before the meeting.
The original policy, announced in July 2026, set mandatory standards for large datacentres covering energy, water and land use. Operators would have to build their own power supply so household energy bills are not affected, minimise their water use, maximise energy efficiency, and pay for any extra water they consume. The government had framed the plan as making Australia a "destination of choice" for AI jobs and investment, pointing to a $500 billion US push to build AI datacentres and the global scramble to secure energy for advanced AI.
The Australian Energy Market Operator forecasts that datacentre power use will increase seven-fold over the next decade. That surge in demand is the backdrop to the whole fight. The government's July framework was already a significant shift in approach, as law firm Dentons noted in an analysis published in early August. Data centres and AI projects sit within a broader federal economic plan that designates them as sectors of national priority, with a 10-year timeline starting from 2026.
Think of it this way: the government set a rule that all new datacentres had to run on clean energy, then handed exemptions to the very states that rely most on coal and gas. Albanese's explanation, that exemptions apply where government-owned power systems have surplus fossil-fuel supply, is tailored to fit Queensland's government-owned generators and the Territory's gas resources. The practical effect is that the states most reliant on coal and gas are the states least bound by the clean energy rule.
What remains is a federal commitment to "consistent mandatory standards" on energy, water and land use, at least according to the communique signed by Australia's leaders. But the communique language, flagging "further consultation," is the standard Canberra way of saying a policy has hit political resistance and needs time to settle. Bowen's threat to override the states has quietly disappeared from the government's talking points.
Also at national cabinet, leaders agreed to further tighten national gun laws. Albanese said federal government intelligence would be shared with state and territory police as part of the deal. No further detail was provided.
The broader context here is that Labor has spent much of 2026 building a story about AI investment, economic opportunity and renewable-energy leadership all rolled into one pitch. The datacentre framework was meant to prove Australia could attract major AI investment without blowing its climate targets. That pitch now has a Queensland-shaped hole in it. A state using government-owned coal power to run datacentres is not what the government's climate-minded backbenchers had in mind when the framework was unveiled.
For the data centre industry, the carve-outs create two different sets of rules. Operators in NSW, Victoria or SA will face the renewables requirement. Their competitors in Queensland and the NT will not. Whether that pushes investment northward or simply splits the national market depends on the detail of the laws, which have not yet been written.
What is clear is that the government's leverage over the states on energy policy has its limits, constitutional powers or not. Bowen talked tough. The states called the bluff. The Commonwealth folded.
