Source By Murray Hunter

BANGKOK, Thailand: Over the past few years, Malaysia has emerged as one of Southeast Asia’s hottest destinations for data centre investment. Buoyed by competitive land and power costs, strategic location near Singapore, government incentives, and the explosive growth of AI and cloud computing, the country has attracted billions in FDI from giants like Microsoft, Google, NVIDIA (via YTL), ByteDance, and others. As of early 2026, Malaysia boasts around 34 operational data centres with dozens more in the pipeline, particularly in Johor and the Klang Valley. Capacity is projected to more than double by the end of 2026.

Yet amid the celebratory headlines about jobs, investment, and digital transformation, a critical debate has been largely absent: the negative externalities of these power- and water-hungry facilities. Without careful planning, the rapid expansion risks straining electricity and water supplies, raising tariffs for ordinary Malaysians, and potentially leaving behind stranded assets if technology evolves faster than expected.

The Scale of Resource Demand

As of April 2026, the government has approved a maximum demand of 2,050 MW of electricity and 55.83 million litres per day (MLD) of water for data centres. Actual usage, however, stands significantly lower. Currently data centres are consuming about 1,102 MW (roughly 54% of approved electricity) and 28.68 MLD of water (51.4% of allocation) as of early 2026.

Energy Transition and Water Transformation Minister Datuk Seri Fadillah Yusof has reassured the public that measures are in place to protect supplies for households and existing commercial users. A national task force now evaluates projects, and state governments are urged to confirm sufficient capacity before approvals.

Still, projections paint a more demanding picture. Tenaga Nasional Berhad (TNB) anticipates data centre electricity demand could exceed 5,000 MW by 2035, which is literally equivalent to a substantial portion of Peninsular Malaysia’s current installed capacity. Applications have reportedly surpassed 11,000 MW in some estimates.

Water demand is equally concerning. A typical 100 MW data centre can consume around 4 million litres daily for cooling. With dozens of facilities planned, especially in Johor, total requirements could strain systems already facing climate variability, ageing infrastructure, and competing demands.

Water Worries and the Push for Reclamation
Water supplies show particular vulnerability. Malaysia currently produces about 48.5 MLD of reclaimed water, with plans to scale this to 118 MLD by 2030. The government is drafting a National Water Reclamation Policy to expand recycled water use for industry, which includes data centres, while ring-fencing treated freshwater for domestic needs.

By contrast, resource-scarce Singapore produces around 760 MLD of NEWater (reclaimed water), roughly 15 times Malaysia’s current output, and has long integrated it into its supply strategy. Some Malaysian facilities, like ZDATA’s Gelang Patah plant, are pioneering zero-potable-water models using onsite reclamation and earning green certifications. Scaling such approaches will be essential.

Critics warn that without accelerated investment in treatment plants, distribution, and efficiency, shortages could emerge within years, especially amid drier weather patterns.

Energy Pressures, Tariffs, and the Nuclear Question

On the power side, the influx is already influencing the grid. Gas-fired generation has surged to meet demand, and TNB is ramping up capital expenditure for grid upgrades. Recent tariff adjustments have raised costs, with data centres in higher voltage categories facing notable increases. While not yet catastrophic for deep-pocketed operators, further rises could erode Malaysia’s cost competitiveness if private investment in new generation lags.

This brings Malaysia to a crossroads. Should Malaysia expand fossil capacity, which risks meeting climate goals, accelerate renewables, which require storage for 24/7 data centre loads, attract massive private investment, or seriously pursue nuclear power.

Officials have openly discussed nuclear as a potential firm, low-carbon baseload option to support net-zero targets and investor confidence. Without it or equivalent additions, meeting both data centre demand and domestic growth while decarbonising will be challenging. There are now lower capital-burdening options in nuclear power generation available from China.

The risk of outages for households and smaller businesses remains real if supply growth fails to match phased ramp-ups in data centre loads. Current under-utilisation of approved capacity provides a buffer, but as facilities come online fully, pressure will mount.

Economic Upside and the Obsolescence Risk
Proponents rightly highlight benefits. Approved investments between 2021 and mid-2025 reached RM144 billion or more, with broader estimates in the hundreds of billions. The sector supports jobs both directly and through multiplier effects, which could reach tens of thousands by 2030, boost GDP, enhance digital infrastructure, and position Malaysia as a regional AI and cloud hub.

Yet a forward-looking concern lingers. The rapid advances in quantum computing. While quantum systems excel at specific problems like optimisation, simulation, and cryptography, and are unlikely to replace classical data centres wholesale in the near term, hybrid integration or breakthroughs could reduce demand for certain traditional workloads.

Facilities built today might require costly retrofits or face shorter economic lives than anticipated, turning some FDI into limited long-term advantage if Malaysia becomes locked into legacy infrastructure.

Time for a National Debate

Malaysia’s data centre surge reflects smart industrial policy in a booming global sector. However, treating it as an unmitigated good ignores the trade-offs. The government’s transparency on usage figures, task forces, reclamation policy, and renewable/corporate PPA pathways are positive steps. Sustainable operators using advanced cooling, solar PPAs, and reclaimed water should be incentivised, while over-reserving of resources faces penalties.

Ultimately, Malaysians deserve a fuller public conversation. How do we balance FDI attraction with resource security and tariff stability? What mix of energy sources aligns with net-zero while powering growth? How do we ensure local communities and smaller businesses are not left bearing hidden costs? And how do we future-proof against technological disruption?

Data centres can be a powerful engine for Malaysia’s digital economy, but only if developed responsibly. The coming years will test whether policymakers can convert this boom into durable, sustainable prosperity rather than short-term gains followed by long-term strains. The conversation can no longer remain on the sidelines.