Malaysia, region’s fastest-growing data center hub, faces intense scrutiny over basic resources

HONG KONG/JOHOR, Malaysia — After overtaking Singapore to become the region’s fastest-growing data centre hub, Malaysia is facing increasing scrutiny as concerns over energy, water use, and community impact begin to challenge the industry’s rapid expansion.

Protests against a data centre complex in Johor state’s southern region — the center of Malaysia’s data centre boom — marked the first major public opposition of its kind in the country. In Selangor, Malaysia’s wealthiest and most populous state, discussions over the impact of data centres on local communities have also become increasingly politicized.

“Two years ago, it was just about building capacity,” said Cheam Tat Inn, managing director of the Malaysian unit of U.S.-based data centre operator Equinix.

“The conversation today is more like, how will you use power? Are you looking at renewables? They want to see how you are going to grow sustainably and responsibly.”

The shift highlights a growing challenge for Malaysia and other emerging Asian economies that have aggressively attracted major technology companies seeking to build artificial intelligence infrastructure. Countries have competed by offering lower land costs and affordable electricity, but rapid expansion has raised concerns about pressure on public resources.

The issue mirrors challenges faced earlier by developed-market data centre hubs such as Ireland, the Netherlands, and Singapore, where rapid industry growth led to debates over competition for electricity and water supplies among businesses, households, and agriculture.

Despite these concerns, global technology companies, along with data centre developers and operators, continue to invest heavily in infrastructure needed to support AI services that require increasing computing power. However, companies are placing greater emphasis on sustainability efforts to gain acceptance from local communities, while governments are introducing stricter standards to maintain public support.

In Johor, China’s ZDATA told Reuters that its data centre operates entirely using treated wastewater and is finalizing a renewable energy agreement with state utility Tenaga Nasional to reduce pressure on the electricity grid. Japan’s NTT said its facility will use a closed-circuit cooling system to minimize water consumption, while Bridge Data Centres, backed by Bain Capital, said solar energy provides more than half of the power supply for its operations in the state.

“Data centres have high public support because we are all using more and more data and we all want high speed,” said Chris Howard, an executive director at consultancy JLL. “But this contrasts very sharply with acceptance of data centres in local communities because of concerns over higher energy prices, water usage, or simply the appearance of large industrial buildings.”

JLL estimated that rising community opposition, along with challenges involving grid connections and infrastructure equipment, contributed to delays of at least three months for 57% of data centre projects worldwide last year.

Renewable Energy and Local Content Requirements

Malaysia is tightening requirements for new data centre developments, particularly in Johor, where projects must demonstrate how they will secure electricity supplies. Renewable energy sources are becoming an increasingly important requirement for approvals.

Late last year, Johor announced a ban on two categories of highly water-intensive data centres, which can require up to 50 million liters of water daily — equivalent to the capacity of about 20 Olympic swimming pools.

Selangor has not imposed an outright ban on new proposals but is reviewing projects to ensure they meet global standards for energy and water efficiency, state executive councillor for investment, trade, and mobility Ng Sze Han told Reuters.

The state is also requiring 30% local content in areas such as integrated circuit design and cooling systems.

“These are highly capital-intensive projects, but historically they have delivered limited spillover to the local economy,” Ng said.

In April, opposition Socialist Party criticized a 1.75 billion ringgit ($428 million) hyperscale data centre project in Selangor, arguing that it prioritized corporate interests over local communities.

As Malaysia increases oversight, some investors may begin exploring other markets in the region, said Savills analyst Nicholas Tuan.

“We’re already seeing more activity and inbound requests for markets like Thailand, where there are larger-scale campuses being built in the south,” he said.

However, Johor remains attractive because of its strong infrastructure, government support, and access to resources, Tuan added.

Singapore’s Data Centre Spillover

Johor became a major beneficiary of Singapore’s 2019-2022 suspension of new data centre approvals after the city-state’s decade-long expansion placed pressure on land, water, and electricity supplies.

Investments flowed into Johor from major technology companies, including Amazon and Microsoft, as well as Chinese firms Tencent and Alibaba.

Even with stricter approval processes introduced since 2024, planned data centre capacity in Johor — including projects under construction and in development — is expected to increase eightfold from current levels to 7,000 megawatts, according to JLL.

Malaysia’s central bank estimates that a 50-megawatt data centre can consume as much water as 2,200 households each day and as much electricity as 22,000 households.

Opposition to the rapid expansion reached a turning point in February when residents of Iskandar Puteri in southern Johor protested the construction of ZDATA’s data centre complex.

Residents raised concerns about potential pressure on water supplies, with some reporting reduced water pressure even before the 300-megawatt facility began operations. ZDATA told Reuters that its facility was not responsible for the water issues.

Other complaints focused on the environmental impact of construction.

Concerns over dust from the construction site led land developer Tropicana Firstwide to establish two free car wash stations for residents.

However, some residents remain concerned about the loss of natural landscapes.

“I chose to buy a house here because of the greenery and the hills behind the property,” one Iskandar Puteri resident said. “Now the land has been leveled for the data centres.”

($1 = 4.0930 ringgit)

-Reporting by Danial Azhar in Johor and Clare Jim in Hong Kong; Additional reporting by Rozanna Latiff and Ashley Tang in Kuala Lumpur; Editing by Anne Marie Roantree and Kevin Buckland/Reuters