Australia’s economy is on a collision course with disaster – and time is quickly running out to change direction.
Economies across the world are cashing in on the artificial intelligence boom, but Australia risks being left behind unless it changes its energy policy.
That’s because a mass adoption of AI requires a massive amount of new data centres – and Australia simply doesn’t have enough baseload power to sustain them, according to experts.
The problem is so concerning that military experts are now sounding the alarm, and are urging the government to radically change its power supply.
Dr Malcolm Davis from the Australian Strategic Policy Institute (ASPI) think tank said the government should consider building nuclear reactors to power new data facilities.
“If we can’t do that then our economy becomes a third-rate economy because we’re not able to use AI effectively,” the space and defence expert told news.com.au.
“If we want to maintain an effective economy and society, we have to have AI as a key foundation and that’s going to demand a lot of power generation.”
Dr Davis said another option was to launch server farms into space.
He said Australia could work with America, Japan and Europe to “collaborate” in that area.
Experts like Dr Davis point out that space offers an endless supply of solar energy and doesn’t come with the same constraints around land, water and electricity that we experience on Earth.
Right now, it’s an arena that China is dominating.
Beijing treats space-based computing as a national strategic priority and has galvanised state-owned industries and government policy towards reaching its goal.
It recently established the state-owned China Aerospace Science and Technology Corporation (CASC). In May 2025, Beijing launched the Three-Body Constellation – the first fully-operational space-based computing network, according to Euro News.
In July, China announced Xingshu, or “Star Hub”, another space-based computing network consisting of 1000 satellites, according to the South China Morning Post. This offers China on-demand, time-based computing services in orbit and allows governments, researchers and companies in sectors such as energy, shipping and finance to rent computing power by the hour.
China’s rapid advance is leaving some tech and military experts feeling uneasy.
Dr Davis said while China had to iron out challenges like ensuring servers stay cool in space and maintaining them from Earth, it was clear Beijing was “making the first moves” to dominate the AI space race.
“The Americans are obviously talking about it and Elon Musk is talking about [his own orbital data centre company] Starmind. But, I think the Chinese are making early moves here,” he said.
“So, the question is, how quickly can they turn those early moves into momentum?”
Dr Davis said China could be 10 years away from developing its own fleet of reusable rockets, making the construction of orbital AI data centres substantially cheaper and easier.
‘Speed and co-ordination’
Seyedali Mirjalili, professor of AI at Torrens University, said China had the “first-mover advantage”.
“Space is potentially a very attractive place for AI computing because you have access to enormous amounts of solar energy and you are not competing for land, water and electricity in the same way as data centres on Earth,” he told news.com.au.
“But it is not a perfect environment. Getting equipment into orbit is expensive, maintenance is difficult, and radiation is a problem. Also, cooling powerful computers in the vacuum of space is technically very challenging. So China has taken an impressive early step, but we are still some way from knowing whether orbital data centres can operate economically at a very large scale.”
He said it was unwise to count the US out.
“The US already has some extraordinary advantages, including companies such as SpaceX with advanced reusable rocket capability and Nvidia as the world’s leading AI chip technology,” he said.
“Where China may have an advantage is speed and co-ordination. China can often align government, research institutions, manufacturers and infrastructure projects very quickly around a national priority. Western countries generally have more regulatory processes and many independent organisations that need to work together.
“That can make them slower initially. But if orbital computing proves commercially valuable, I think the US in particular has the technology and capital to move quickly too.”
He said the US held advantages in frontier AI models, advanced chip design, private investment, cloud infrastructure and the commercial technology ecosystem around AI.
It was is home to Silicon Valley and mega companies like Google, Anthropic and Open AI.
But China is catching up quickly, he warned.
“What has changed dramatically is how small the technology gap has become. A few years ago there was a clear performance gap between the best American and Chinese AI models,” he said.
“Today that gap is very small, and in some areas Chinese models are competitive with the world’s best. So I don’t think we can really talk about one country having overall AI superiority anymore. Different countries now have advantages in different parts of the AI ecosystem.”
‘Double-edged sword’
Prof Mirjalili said if Beijing succeeds, it could “quite significantly” change the AI race.
“Until now, we have mostly thought about the AI race in terms of who has the best algorithms, models and computer chips. Increasingly, it is becoming an infrastructure race as well. Countries will compete over who has access to the most computing power, energy, chips, data centres, communication networks and perhaps even launch capacity,” he said.
“Orbital data centres could become another layer of that infrastructure. The country that learns how to build and operate them reliably and economically first could gain years of practical experience and potentially help establish the technical standards that everyone else later follows. That is why I think China’s move is very important for the future even though it is far too early to declare a winner in the broader AI race.”
Dan Lloyd, head of the Space Industry Association of Australia (SIAA), said there were a number of indications China could pull ahead of the West.
He said the US government’s annual assessment of Chinese military strengths found Beijing had innovative and “highly effective” assets in orbit.
This included space lasers, remote-controlled robots and spacecraft capable of carrying out electronic warfare.
“China is very serious. It has many assets up in space, and the Allied ecosystem needs to accelerate its capability to ensure that we don’t lose advantage in the most critical domain for economic growth, for national security, for economic resilience, for defence,” he said.
“China has already deployed the first 12 of its 2800 satellite constellations that are an interconnected AI supercomputer on orbit. It’s already up there. It’s already happening.”
But the kit can also be a “double-edged sword”, according to Dr Davis.
“Once you put this infrastructure up in space and it’s effectively not only running military forces, but it’s also running economies and cities and so forth and everything in our modern society, it becomes critical terrain that must be defended.”
Orbital data centres need protecting from space junk and enemy interference, Dr Davis said.
“Already the US is responding to the Chinese and Russian moves by declaring space as a warfighting domain and is starting to think in terms of orbital warfare and what that would require in terms of military capabilities,” he said.
“They stood up in 2019 the US Space Force for this reason, to respond to the PLA’s (People’s Liberation Army) strategic support force, which is now the PLA Aerospace Force. So yeah, I think all the trends are heading towards space going from an operational domain to a warfighting domain.”
A spokesperson for the Department of Industry, Science and Resources said the government has been clear that data centres will have a pivotal role in Australia’s future economic prosperity.
They said the technology will provide Australians with the computing power they need to take full advantage of technology like AI.
“But we have to get this right. While Australia welcomes this investment, we need to ensure data centre and AI infrastructure is built to Australian standards and values, and in a way that balances the needs of our communities, our industries and our environment,” they said.
“This means not adding additional pressure to our energy grids or water resources. It means meeting the strict environment and planning approvals to meet Australian laws.”
Tim Ayres, the federal minister for industry and innovation, previously said AI firms operating in Australia would have to invest in more renewable energy than they consume. He also said nuclear energy was “a dumb idea” and very expensive.
In July, Prime Minister Anthony Albanese announced the establishment of The Office of AI. The body will work with several departments to co-ordinate the design of new Australian standards for AI.
News.com.au understands the government is not aware of any proposed Australian orbital data centre developments.