South Island eyes AI gold rush with billions in data centre potential

Monday, 14 July 2025

A global surge in artificial intelligence is driving unprecedented demand for data centres, positioning the South Island to reap billions of dollars in economic benefit.

Its cool climate and abundant renewable energy are drawing serious interest from tech firms seeking a base for high-performance computing.

But while early developments are promising, experts warn the window of opportunity is narrow and closing fast.

Data centres are essentially large buildings full of computers that store and manage the information people use online, such as websites, emails, apps and AI tools.

As AI becomes more widely adopted, demand for powerful, energy-hungry data infrastructure is surging. These hyperscale data centres are purpose-built to support the intensive computing demands of artificial intelligence.

A recent Microsoft-backed report projected that these could generate $1 billion annually for New Zealand by 2035.

The broader AI economy, the report suggests, could contribute $76b to GDP by 2038 - a boost of 14% per capita.

The South Island, with its hydro resources and cooler temperatures, is well positioned.

Tech giants including Microsoft, Amazon Web Services (AWS), and Datagrid are all making strategic moves in New Zealand.

While Microsoft and AWS are focused on the Auckland region, Datagrid has chosen a different path.

The company is planning to build a $5b hyperscale data centre campus in Makarewa, near Invercargill. If completed, it would be one of the largest developments in New Zealand and a major facility in the South Pacific.

The economic upside for the South Island could be substantial.

According to Datagrid, its Makarewa project alone is projected to deliver more than $7b in economic benefits over 15 years, including hundreds of construction jobs and a smaller but ongoing number of highly skilled roles once operational.

Beyond direct employment, the development is expected to spur growth in local services, infrastructure and digital industries, contributing to broader regional diversification away from traditional sectors such as agriculture and aluminium smelting.

“Southland’s cool climate and proximity to abundant renewable energy were decisive factors in Datagrid’s site selection,” said Emily Reeve, general counsel for Datagrid.

“The region’s average temperature of around 9C significantly reduces cooling costs and energy consumption, making it ideal for large-scale, energy-intensive AI data centres.”

The company has secured a 49-hectare site and received Overseas Investment Office approval. The next milestone is obtaining resource consent.

Law firm MinterEllisonRuddWatts is advising on a number of digital infrastructure matters, including data centre developments.

Partner Tom Maasland and senior associate Jessica Bremner say the South Island’s advantages are not just theoretical. They highlight its high renewable energy mix, largely from hydro and wind, and the naturally cool climate, which limits the need for energy-intensive cooling systems.

In places like Singapore, where data centre growth has been rapid, energy use has become unsustainable.

“Singapore has closed off building data centres because of the impact on their energy production,” said Maasland.

“Plus the heat generated by the data centre requires so much energy to cool them that it’s actually very environmentally damaging.”

But the transition to the South Island being a digital infrastructure hub will not be without challenges. Grid capacity, fibre connectivity, and workforce readiness all pose hurdles.

“We do need to improve the grid connection capacity,” said Bremner. “It obviously depends on where you're going to be putting a data centre in the South Island as to whether that’s relevant or not.”

Microsoft managing director for New Zealand Vanessa Sorenson says the potential benefits are significant, and extend beyond the immediate jobs and construction.

“Growing our AI data centre infrastructure also unlocks significant growth for local firms, beyond the jobs directly created by new builds, as it supports greater AI adoption,” Sorenson said. “The report shows AI adoption could increase GDP per capita by 14%.”

However, Sorenson said Microsoft had no plans for a South Island hyperscale centre, preferring Auckland since it offers proximity to major population centres and stronger corporate demand, while still maintaining access to renewable energy sources.

Its facility is backed by a renewable energy agreement with Contact Energy that enabled the construction of a new geothermal power station. The company has also bought land for future expansion.

Reeve said Datagrid’s Makarewa campus is being designed specifically for AI workloads, with features to support high-performance computing and machine learning model training. The project includes energy-efficient design and planning for resilient international connections.

Datagrid is working with local iwi and other stakeholders to ensure the development respects environmental and cultural values.

Despite the economic promise, data centres are not without controversy.

Globally, critics have raised concerns over their high electricity and water consumption, land use, and the potential strain on local infrastructure.

In New Zealand, the conversation has been more muted, but some environmentalists and policy experts warn that large-scale developments could lock in future demand on the electricity grid, possibly diverting renewable energy away from households or other industries.

Bremner also acknowledged that although data centres have a lighter footprint compared to other large developments, their energy demands could still create pressure. “That’s not to say there isn’t an impact, but there’s an impact on building anything,” she said.

Data sovereignty is an increasingly important issue as data centre development accelerates in New Zealand. Hosting and processing data onshore gives organisations more control over how it is managed, and for Māori, data is considered a taonga, requiring protection under tikanga.

“From a data security perspective, we could host our data here and have it processed here inside the data centre with that [AI] model … which is good from a government perspective, from a Māori data sovereignty perspective,” said Maasland.

Connectivity is also a central concern. The South Island currently lacks a direct international fibre connection.

Projects like the Tasman Ring Network* - due in 2028 - are seen as essential to reducing this dependency and enabling reliable, low-latency data flows. They will link the South Island to Australia.

“If you have a cable coming off the South Island, you instantly create the ability to generate more industry out of that location, just simply from virtue of the fact that the cable is bringing the data right to that location,” said Maasland.

Despite the momentum, there is concern that New Zealand could miss out if it does not act quickly. Australia, for example, has implemented a national digital infrastructure strategy and offers incentives for development. New Zealand does not yet have an equivalent approach.

“There is a risk if we don’t do anything,” said Maasland. “Yes, we'll just be a taker of data from offshore. What would be great is if we could build these data centres here and then host our data here.”

* Clarification: An earlier version of this story referred to a proposed Hawaiki Nui cable. This project is not proceeding. An out-of-date sketch of a proposed data centre near Invercargill has also been removed from this story. (Updated 4pm, July 14, 2025)