Prime Minister Anthony Albanese had been pushing for mandates for AI data centres to provide their own renewable energy, as the use of the technology rapidly increases.
But Queensland and the Northern Territory received a carve out from the federal government following a national cabinet meeting on Wednesday, allowing for centres in those jurisdictions to be powered by coal and gas.
The backdown came a day after the grid operator warned energy demand from data centres was expected to rise by almost seven times over the next decade, adding the National Electricity Market should remain reliable into the 2030s if renewable projects are delivered on time.
Industry Minister Tim Ayres said renewables would still play a role for AI data centres, but jurisdictions that carved their own energy path for the hubs also needed to ensure consumers weren't affected.
"The principle has to be there cannot be upward pressure on electricity prices," he told News 24 on Friday.
"Additional renewable generation is required because that means the lowest possible cost outcome."
Sasha Titchkosky, a member of the Sydney-based Lane Cove Responsible Planning community group that's been speaking out about a proposed data centre development in the area, said the carve-outs set a dangerous precedent.
"The goalposts just constantly keep changing, and when you're fighting to protect your community and ensure that the things that are really important to your community hold true, it becomes very difficult to kind of be handballed from one side of the field to the other," she told AAP.
She said the move away from enforcing renewables for data centres to allow for coal and gas was a concern, just weeks after the proposed federal mandates were unveiled.
Climate Council chief executive Amanda McKenzie said the needs of community, rather than AI companies and the energy industry, needed to come first..
"This is a question of whether data centres bring genuinely new clean energy with them, or soak up capacity the rest of us need," she said.
"Clear and consistent national standards that deliver additional renewable energy, without any exceptions, is the only way to avoid higher power prices and pollution."
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