The tide is changing in Malaysia as data centres continue to strain the country’s energy and water infrastructure. In January, the environment minister warned that tech companies should expect to pay extra fees to access resources. A month later, the national water regulator issued a similar warning, saying investors would have to tap into alternative water sources to ease the pressure on the public water supply.
“This is a result of insufficient supply of water to facilitate these data centres,” Commission Chairman Charles Santiago said to reporters as he announced the decision. “Hence, alternative resources must be considered.”
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It comes as a reality check to investors from around the world that have been pouring billions into Malaysia and surrounding members of the Association of Southeast Asian Nations (ASEAN) to develop the infrastructure that will power the world’s artificial intelligence (AI) services.
Despite a global downturn in foreign direct investment (FDI) flows, big-value greenfield projects related to AI infrastructure have been rising in Southeast Asia. UN Trade and Development calculates that ASEAN’s FDI intake grew by 2% in 2024, to a new record of an estimated $235bn.
These major AI-related investments in the region have generated headlines for the past year. A few examples include Oracle’s $6.5bn cloud service investment in Malaysia, Microsoft’s four-year investment commitment in Indonesia of $1.7bn and Amazon Web Services’ $9bn cloud infrastructure plans in Singapore.
While the world economy continues to be shrouded in uncertainty, the booming AI industry that so many businesses are now planning their future around must contend with the practical difficulties of establishing the necessary infrastructure for its development.
Sustainable data centres
Understanding the exact amount of water and energy that data centres require is not easy, but we do know that the demand is high enough to put a strain on resources. One way to calculate it is by looking at the overall increases in electricity consumption of companies developing AI products.
Aaron Gordon, a data journalist who completed a six-month investigation into data centre resource consumption for Proof News, explains: “In the past five years, Google’s electricity consumption has increased 186%, Microsoft’s has increased 186% and Meta’s has increased 367%.”
Water usage has also grown. Microsoft’s water consumption grew 34% from 2021 to 2022, and Google’s increased 22%. He notes that these spikes are correlated to increases in AI investment and development.
Major companies have already faced public scrutiny over how these facilities affect local resources. In September 2024, a court ordered Google to halt a data centre project in Chile over environmental concerns. And, while this sort of public scrutiny might pressure big companies to make infrastructure more efficient, Gordon highlights that they often outsource these services to third-party providers. These providers do not face the same pressure and are likely to be far less efficient.
In Southeast Asia, companies are increasingly pursuing this strategy as it grants them market flexibility even if it undermines their sustainability pledges.
Research director for strategic intelligence at GlobalData Bill Rojas tells Investment Monitor: “Hyperscalers are leaning nowadays to leasing from third-party providers who specialise in data centres. For example, Microsoft has been pursuing leasing deals rather than self-build whenever it can. By having options to lease larger amounts of space a hyperscaler can secure space if the market picks up or withhold if the market slows down.
“In Southeast Asian markets, we expect that data centre specialists and/or companies that specialise in real estate development will be looking at the data centre opportunity.”
Powering these centres with renewable energy is also a challenge, as environmentally there are certain conditions needed to provide clean energy.
“In many cases, it’s hard to save water when you’re trying to pivot to green energy. When building solar, the adage is to follow the sun,” Gordon explains. “But places with ample solar power also tend to be places that are hot and dry, so not a ton of water there. And the hot climate, means more water has to be used to cool the servers.”
Rojas notes that this difficulty exists in Southeast Asia.
“In terms of renewable energy, except for nuclear, 100+ MWatt-level data centres will be hard to supply with renewable energy in some geographies just due to the costs of shipping the materials to make the biofuels,” he says. “There are a number of companies and investment groups looking at biofuels and the like but the sheer size of the planned mega data centres will be very challenging.”
Water is also increasingly an issue. Rojas explains that Taiwan has been facing issues providing enough water not only for data centres but also for semiconductor manufacturing. Singapore has taken some steps towards alleviating the water strain with “strict rules in place requiring alternative sources of water such as reclaimed water, rainwater, recycled water and distilled water, alongside implementing cooling technologies that consume less water.”
Few places in the world can provide abundant renewable energy while keeping water usage. Gordon notes that the ones that do exist such as Ireland, tend to already be overloaded with data centres.
Resource limits
These considerations create two main challenges for the development of this infrastructure. First, current resources are already feeling the strain. Second, the region is unlikely to have the capacity to grow its renewable energy sector on par with the energy requirement.
Singapore has been a regional leader in data centre development, even before the AI boom occurred. But then, in 2019, the country had to impose a moratorium on building new data centres because of the strain on its resources.
According to Data Centre Dynamics, a few years before the moratorium came into effect, Singapore began investing in initiatives that suggested that “the key concern had always revolved around sustainability.” The country trialled a tropical centre in 2016 and high-rise data centres in 2017. It has also funded research into increasing resource efficiency.
The publication also suggests that, despite the massive effort to produce more solar power and increase sustainability standards, solar power would only be able to produce 4% of the country’s electricity intake by 2030. However, data centres used 7% of electrical output in 2020 and the demand is set to increase.
The moratorium in Singapore led many companies to neighbouring Malaysia, where similar problems regarding resource usage are starting to take centre stage.
“It took the government some time to understand fully what are the impacts of data centres, to the local economy, to the broader resource management and also the GDP,” Timothy Wong, senior analyst at strategic advisory firm BowerGroupAsia tells Investment Monitor.
In the beginning, it was “quite simply a push for more investment in the country and so they were allowing a lot of investments to come in.” But “slowly the government has started to realise that these data centres have an impact on natural resources.”
Wong highlights that the country has an ageing energy grid meaning a lot of equipment is reaching the end of its life.
“In this sense, because of the growing amount of data centres sprouting up in the country, this is also an issue in that the demand is far outstripping the supply,” he adds. “And there are concerns of an energy crisis looming in the next couple of years if nothing is done.”
According to BowerGroupAsia, the electricity demand from data centres alone is set to reach 22.5GW by 2050. In 2023, the Tenaga Nasional Berhad’s grid (which provides electricity to the parts of the country where most data centres are located), produced 25.9GW.
Urban centres also routinely experience water outages, as Malaysia is a “somewhat water-stressed country,” Wong says. However, Wong notes that in the areas that have most received this type of investment like Johor, “water has not presented itself as an issue because it’s one of the few success stories in which water supply is stable.”
Cautious movements
In Malaysia, developing renewable energy, maintaining itself as an attractive market, and ensuring FDI actually contributes to the country’s socioeconomic growth is a balancing act.
On one hand, the government is trying to phase out coal fire plants, but “it’s also cheap to generate coal. And the cost is actually in developing renewable and sustainable systems to generate power,” Wong says. “We’ve had a huge push in the solar side of things. But even then that is a high capital cost and also maintenance. And for all that, the current technology is probably only at under 30% efficiency.”
Low energy costs have been a strong incentive for tech investors in Malaysia, and switching to renewable energy completely would make these costs spike.
The Malaysia Energy Commission is therefore looking at charging premiums on this vast energy usage, but Wong says: “Data centre companies are saying that we’re using up so much of your energy. We’re paying you so much. Why don’t you give us a preferential rate?”
The government has also done a few economic studies showing that “the economic impact [of these foreign tech investmetns] is not as great as purported,” Wong highlights.
Therefore, regulators have become more stringent.
“If we take the example of Johor state, I think last year they announced that they rejected 30% of data centre investment entries,” Wong says. “And this caused some alarm to the developers saying, what does that mean for us now? Is this going to be a trend that keeps happening? And the answer is yes.”
“So I think investors will have to be innovative in terms of what they can bring to the table when they want to invest,” he advises.
