Can Southeast Asia balance digital expansion with its clean energy priorities? As global demand surges for cloud computing, e-commerce, and generative artificial intelligence (AI), ASEAN states are emerging as critical nodes in the global digital infrastructure landscape. A major component of this growth is the expansion of the region’s data centres, fuelled by significant investment from foreign Big Tech.
This development unfolds alongside a parallel policy priority — the region's transition towards sustainable energy systems. Across ASEAN, governments have strengthened commitments on decarbonisation, energy security, and regional power integration. Yet, the energy-intensive nature of the digital economy reveals a complex tension between the trajectories of digital growth and energy transition, raising a key question: can the region sustain its digital ambitions while honouring its clean energy goals?
Southeast Asia’s data centre boom
ASEAN’s digital economy has become a central pillar of its growth strategy, with governments across the region seeking to position themselves as major hubs for digital services. The ASEAN Digital Economy Framework Agreement demonstrates this, constituting the region’s first digital economy agreement aiming to establish digital trade rules to unlock the full potential of ASEAN’s digital economy — which is projected to double to US$2 trillion by 2030.
ASEAN’s ability to reach its digital economy ambitions depends on the physical infrastructure that underpins it. Central to this are data centres, which facilitate cloud services, support AI model training, and handle the storage and processing of vast volumes of data.
For much of the past decade, Singapore has served as the region’s primary data centre hub, enabled by connectivity, political stability and a strong regulatory environment. However, structural constraints, including limited land availability and concerns over energy consumption, have led decision makers to restrict further data centre construction.
With these limitations, significant foreign investment is now flowing into neighbouring countries. Malaysia is emerging as Southeast Asia’s fastest-growing data centre market due to its lower costs of land and energy, and proactive government support. In particular, Johor is rapidly developing into a major data centre cluster, positioning Malaysia to surpass Singapore as the region’s largest data centre hub in the coming years.
Regional cooperation through clean energy transitions
At the same time, the region is striving to deepen cross-border clean energy cooperation and interconnection. Within the ASEAN Power Grid, the long-standing vision of a fully integrated regional electricity network is beginning to move towards operationalisation through a growing number of regional projects and agreements. Despite persistent gaps, ASEAN member states are making tangible progress on cross-border integration, signalling deepening regional energy cooperation.
However, this is evolving precisely as electricity — and, increasingly, water — demand rises sharply due to the expansion of digital infrastructure. In other words, efforts to integrate renewable energy across borders are accelerating at the same moment that data centre demand places new pressure on regional power and water systems, illustrating the stark tension between ASEAN’s digital economy and its clean energy ambitions.
The environmental impact of data centres
Data centres are among the most resource-intensive components of the digital economy. Requiring continuous, high-density electricity supply — much of which is still generated from fossil fuels — data centres place significant pressure on existing energy systems. As generative AI scales across sectors, these energy requirements are only anticipated to intensify further.
Additionally, rising water demand adds another layer of pressure to local resource systems. Data centre cooling systems — particularly in Southeast Asia’s tropical climates — generally rely on significant volumes of water, meaning that data centre expansion can simultaneously strain local water supplies. While Malaysia’s relatively abundant energy and water sources have supported expansion, sustained growth at the current pace is likely to intensify long-term resource security challenges.
Beyond energy and water use, the local impact of data centre development extends to nearby communities. Construction and operations generate noise, dust, traffic disruption, and pressure on neighbourhood amenities, especially where facilities are located close to residential areas. In Johor, for example, residents near data centre construction sites increasingly raise concerns about pollution, structural impacts, water availability, and long-term consequences for health.
Under the right circumstances, however, Lee Kuan Yew School of Public Policy’s Assistant Professor Ba Yuhao believes in the potential for digital growth to support clean energy goals.
“If well-governed, the predictable electricity demand could help finance renewable energy, storage, transmission and cross-border electricity trading,” he explains. “In that sense, ASEAN’s digital economy expansion could help accelerate the ASEAN Power Grid from a long-standing aspiration into a more commercially urgent project. But the political challenge is to avoid uneven development.”
Governance challenges
As data centre expansion accelerates amid growing climate insecurity, the central challenge is increasingly one of governance – whether policy frameworks can manage growth in ways that align digital investment with energy, environmental, and social priorities.
Under the Malaysia Digital Economy Blueprint, for example, the development of digital infrastructure is prioritised as a central pillar of growth, with ambitions to position the country as a regional hub for data centres. This direction is further reinforced by national AI initiatives, which heavily depend on large-scale infrastructure.
Malaysia’s approach differs from Singapore’s more tightly managed planning model, where new data centre approvals are closely linked to land constraints, energy capacity, and sustainability considerations. With a model that prioritises investment and expanding capacity, Malaysia’s facilitative approach has been effective in generating economic growth, but it also means that governance frameworks are more exposed to rapid, market-led growth.
This points to a wider social policy challenge: planning systems need to account for local exposure to construction disruption, land use change, and community consultation alongside energy and environmental standards.
“My concern is not the expansion itself, but uncoordinated expansion,” reflects Asst Prof Ba. “Data centres could be very positive for ASEAN’s digital economy, but they should be treated as strategic energy and environmental infrastructure, not just as real estate or ICT projects.”
Drawing on his ongoing research on public preferences for greener AI infrastructure governance, he notes that governance capacity depends on whether the state has credible safeguards, whether reporting and auditing are verifiable, whether the public has meaningful channels for participation, and whether local burdens are addressed through tangible equity provisions.
The limits of ‘sustainable’ data centres
In response to growing scrutiny, discussions around ‘sustainable’ or ‘green’ data centre facilities are increasing, viewed by some as an opportunity for green innovation. These approaches typically involve measures such as improved energy efficiency, advanced cooling systems, and the procurement of renewable energy credits. In some cases, operators also emphasise designs that reduce water consumption or integrate with lower-carbon electricity sources.
“However, the reality is that a data centre’s environmental footprint is heavily influenced by the electricity system it operates within,” says Assistant Professor Jie-Sheng Tan-Soo. “In countries where the grid remains dependent on fossil fuels, even highly efficient data centres are still associated with significant carbon emissions.”
Asst Prof Tan-Soo also notes that the effectiveness of these measures is constrained by the scale and speed of demand growth.
“Data centre investments are often approved relatively quickly because governments see them as engines of economic growth, foreign investment, and job creation. By contrast, energy planning, grid upgrades, and renewable energy projects typically take much longer to implement.”
This means that sustainability improvements at the facility level, while important, cannot be treated as a substitute for wider energy-system planning.
Can digital expansion and environmental limits be reconciled?
Ultimately, the region’s data centre boom is not just a story of economic opportunity, but a test of whether ASEAN can align its digital ambitions with the environmental limits it has set for itself.
“If countries compete aggressively to attract hyperscale data centres by offering cheap electricity and regulatory flexibility,” cautions Asst Prof Tan-Soo, “this could undermine broader climate commitments.”
Asst Prof Ba remains optimistic. “Since the benefits of data centres are often regional or global while their impacts are local, then transparent governance, benefit-sharing and cross-border energy cooperation will be central to making this expansion sustainable.”