Wasted Power: Data Center Regulation in China

Opening the Market

China has the largest internet user base in the world, with more than 1 billion people online. But, unlike in Europe, strict data localisation laws mean that all Chinese data must be stored ‘inside the Great Firewall’ (ie, within the country). This makes domestic data centres the backbone of China’s digital infrastructure.

For the first time, in early 2025, China opened the door to full foreign ownership of data centers under the new Free Trade Zones framework. This will likely trigger a boom in new development as international players rush to tap into this enormous online market.

In 2022, regions such as Shanghai Lingang and Guizhou offered land grants, discounted energy, and fast-tracked approvals. Meanwhile, western provinces like Inner Mongolia and Gansu provided cheap renewable power and favourable conditions for large-scale builds. Naturally, policies like these will accelerate the expansion of China’s data center sector.

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Policy Drivers

The Dual Carbon Pledge

China’s climate goals set the tone for everything that follows in its data center policy.

In September 2020, President Xi Jinping announced:

Peak carbon dioxide emissions before 2030
Achieve carbon neutrality before 2060

To ensure progress is made towards these goals, the National Development and Reform Commission grades local governments on energy performance. That pressure trickles down to cities and provinces, which in turn tighten rules on data centres to hit efficiency targets.

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Data center rules

A push for PUE

China’s policies have one of the strictest Power Usage Effectiveness (PUE) targets and regulations worldwide.

The 2024 Green Development Action Plan for Data Centres set the target of bringing the national average down to below 1.5 by 2025, alongside stricter water efficiency standards and a push for energy-saving technologies. Guidance from the Ministry of Industry and Information Technology (MIIT) went further, suggesting large facilities in cooler regions should hit PUE levels of 1.3 or lower.

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Waste Heat and Resource Utilisation

Industrial Catalogues

China has no binding national regulation for waste heat reuse. However, it is promoted through a mix of adjacent policies and investment incentives.

One of the main policy tools is the system of Industrial Catalogues (产业政策目录), which set out priority industries that qualify for state support. The most relevant entries include:

• energy efficiency
• waste heat recovery
• circular economy
• renewables
• environmental protection

This means that while reuse is not mandated, it is placed within a category of industries that benefit from favourable policies. Projects classed as “compliant with the industrial policies of the State” can access preferential treatment such as tax breaks, easier financing, and faster approvals.

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Tax Incentives

These catalogue priorities are reinforced by the tax code, which sets out a number of measures that directly or indirectly support waste heat recovery.

• Under Cai Shui No. 115 (State Administration of Taxation and Ministry of Finance), projects that generate and sell electricity or heat from residual industrial heat or pressure are eligible for a 100% VAT refund upon collection.

From the Enterprise Income Tax Law of the People’s Republic of China, several further provisions are also relevant:

• Article 27: “Tax on income derived from qualified projects of environmental protection or energy and water conservation may be exempted or reduced.”
• Effect: if waste heat recovery is framed as an energy-saving project, operators could reduce taxable income, improving project payback.

• Article 32: “Where accelerated depreciation of the fixed assets of an enterprise is deemed necessary due to technology advancement or other reasons, depreciation period may be shortened, or accelerated depreciation methods may be adopted.”‍
• Effect: firms investing in waste-heat technology can recover costs faster through tax relief, boosting adoption.

• Article 33: “For income derived by an enterprise from manufacturing products which are compliant with the industrial policies of the State by way of comprehensive utilization of resources, the amount may be deducted when calculating taxable income.”
• Effect: direct sale of waste heat is unlikely to qualify, but if it is used to generate electricity or secondary products, that revenue could be deducted, strengthening the business case for more complex reuse systems.

• Article 34: “The amount of money an enterprise invests in the purchase of special equipment for environmental protection, energy and water conservation, and safe production may be credited against the tax payable at a certain proportion.”
• Effect: data centres that install dedicated waste-heat recovery systems could offset part of their investment directly against taxes, lowering upfront costs and encouraging uptake.

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Waste heat and heating networks

Some cities, such as Beijing and Shanghai, have launched waste heat recovery demonstration zones, often linked to district heating projects. In Beijing and across northern China, district heating systems are already well established and in some cases make use of industrial waste heat. These networks currently supply around 88% of urban heating demand in northern cities, yet about 90% of the heat still comes from fossil fuels.

Studies suggest that data centre waste heat could significantly shift this balance. Properly matched with district heating systems, it has the potential to cover up to 90% of heating demand. In the most optimistic scenarios, by 2060, data centres alone could supply as much as 300 PJ of waste heat, equivalent to the contributions of today’s industrial sector.

In areas around Beijing, such as Tangshan, pilot projects are already trialling combined heat-and-water systems that channel industrial waste heat into local district heating. These projects offer a likely blueprint for how data centre heat could be integrated into wider urban networks in the future.

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