Microsoft spent five years proving underwater data centres work, then walked away in 2024. China’s BHDT has been running one commercially since 2023. Same technology. Same PUE numbers. So what happened?
The short answer is demand. Seawater passive cooling really does achieve a PUE of 1.07 — you can verify that from both Microsoft’s Orkney results and BHDT’s operational Hainan facility. But that efficiency gain only justifies deployment cost if you’re running enough compute to make the economics work. Microsoft wasn’t. China is.
Here’s what this article covers: what the Hainan facility actually is, how seawater cooling gets to those efficiency numbers, what Microsoft proved and why it stopped, and what the “thermal debt” controversy is really arguing. For the broader picture of where underwater sits in the alternative data centre landscape, see the Computing Beyond the Grid overview.
What Is China’s Underwater Data Centre and Where Is It?
Beijing Highlander Digital Technologies (BHDT) and its subsidiary Shenzhen HiCloud Data Centre Technology operate China’s first commercial underwater data centre off Lingshui County, Hainan Island, in the South China Sea. It’s been running since March 2023.
The specs: a 1,300-tonne sealed pressure vessel sitting at 35 metres depth. Each cabin holds 24 racks, 400 to 500 servers, pressurised with dry nitrogen. Phase 2 added a second module in February 2025, and Hainan’s 14th Five-Year Plan targets 100 cabins at the site. HiCloud has also launched Hailanyun off Shanghai — offshore wind-powered, May 2026, 2,000 servers, 24 MW.
This isn’t a pilot. The facility runs live production AI workloads — 7,000 inference queries per second.
One thing worth flagging if you’re in a US-regulated business: BHDT is on the US Commerce Department Entity List. US-based firms face restrictions on exporting items, software, and technology to listed entities. If you’re subject to US export controls, any BHDT engagement needs a legal review first, full stop.
The facility operates within the Hainan Free Trade Port policy framework — green development is written into all planning decisions, which is a big part of why BHDT could move so fast.
How Does Seawater Cooling Achieve a PUE of 1.07?
PUE — Power Usage Effectiveness — is total facility energy divided by IT equipment energy. A perfect score is 1.0. The industry average sits around 1.58; well-run hyperscalers like AWS and Google average 1.1 to 1.2. At 1.07, only 7% of total power goes to overhead — cooling, lighting, power conversion. At 1.5, that’s 50%. That’s roughly 30% more efficient than a well-run hyperscaler.
The mechanism is straightforward. Server heat is conducted through the sealed metallic hull into ambient seawater via copper-pipe heat exchangers. No pumps. No mechanical chillers. No active cooling loop. The seawater is the radiator.
Why it holds up so well: at 35 metres depth, seawater temperature is stable year-round — no warm-day degradation, no evaporative water loss, no refrigeration energy draw. The inert nitrogen atmosphere limits corrosion and removes the mechanical vibration and temperature fluctuations that accelerate hardware failure on land.
Microsoft’s Project Natick Phase 2 at Orkney measured the exact same PUE of 1.07. This isn’t a China-specific result — it’s a property of the cooling mechanism itself. For a deeper dive into how the thermodynamics actually work, see the physics of alternative data centre cooling.
What Did Microsoft Project Natick Prove, and Why Was It Not Commercialised?
Phase 1 ran for 105 days in 2015 off California. It was a proof of concept — servers could operate underwater in a sealed vessel without failure. Phase 2 ran from 2018 to 2020 off the Orkney Islands, with 864 servers over 25 months. PUE 1.07 confirmed at scale. Server failure rate underwater was 0.7% versus 5.9% on land — roughly a 6x improvement, attributed to the nitrogen atmosphere and the absence of human-caused disturbance. Microsoft called it a success. The results weren’t disputed.
Then in June 2024, Microsoft announced it would not build subsea data centres anywhere in the world. Three reasons.
First, the sealed hull is fixed capacity. You cannot upgrade or replace hardware without surfacing the entire pod. A land data centre swaps GPU generations in-place. An underwater pod cannot. During the H100 to H200 to Blackwell hardware cycle, that’s a structural problem.
Second, seabed permitting is a multi-jurisdictional obstacle — and without state backing, it’s a serious one. Microsoft ran Phase 2 on a research permit. Commercial deployment needs seabed leases, environmental assessments, and ongoing regulatory approval across jurisdictions.
Third, the economics at 2020 demand levels just didn’t justify the incremental costs. Deloitte Insights put it plainly: Microsoft ended the programme; Chinese Highlander deployed commercial modules with government backing. The technology worked. The conditions for commercialisation weren’t there.
Why Do the Economics Work for China Now When They Did Not Work for Microsoft?
The technology didn’t change. The demand did.
China’s internet firms — Alibaba, Baidu, ByteDance, Tencent — are investing over $70 billion in AI infrastructure in 2026 alone (Goldman Sachs). Data centre capacity is growing from 32 GW toward 60 GW by 2030, with intelligent compute expected to grow roughly 43% year over year. At that scale, a 30% efficiency gain over a well-run hyperscaler stops being a curiosity and becomes worth engineering for — the PUE savings that didn’t justify deployment costs in 2020 are now material.
There’s also a policy driver. New facilities in China’s 8 national computing hubs must source at least 80% of their energy from renewables. Underwater coastal deployment addresses this directly: seawater cooling cuts total energy consumption, and offshore locations tie directly to offshore wind. BHDT’s facility draws power from nearby offshore wind sources and avoids consuming land or freshwater.
BHDT is a state-adjacent operator in an environment where the government controls both permitting and the demand signal. What took Microsoft years of research permitting in UK waters, BHDT navigated as a domestic state-enabled deployment.
BHDT manages the fixed-capacity constraint by adding new pods rather than upgrading sealed ones — but individual cabins remain fixed-capacity. Subsea Cloud’s Jules Verne pod in Port Angeles, WA (9m depth, 16 racks, 1 MW) shows the technology works commercially outside China too — the demand and regulatory conditions just differ. For the geopolitical implications of that distinction, it matters quite a bit.
What Is the “Thermal Debt” Controversy?
“Thermal debt” was coined in a 2024 National Interest article arguing that underwater data centres discharge waste heat as an unpriced externality. Ding Duo in China Daily called it absurd and unscientific — tests show temperature increases of under 1–2°C at the outlet, dissipating within metres. Microsoft’s own Natick measurements showed ambient increases of a few thousandths of a degree.
Neither source is neutral. The National Interest has an obvious interest in framing Chinese AI infrastructure negatively; China Daily has an equally obvious interest in defending it. Neither is a peer-reviewed environmental impact study.
What is factual: seawater does warm from the heat discharge. Initial studies suggest limited impacts at small scales, but uncertainty remains about cumulative effects at large-scale deployment. No standardised Environmental Impact Assessment framework exists as of 2026. At current density, the impact is unlikely to be material. At 100-cabin scale, the evidence base doesn’t yet exist. This is a monitoring issue, not a settled verdict.
What Does the Underwater Data Centre Market Look Like in 2026?
The global underwater data centre market was valued at around USD 3.2 billion in 2025 and is projected to reach USD 14.8 billion by 2034 at 18.6% annual growth (DataIntelo). Fast-growing niche. Not yet mainstream infrastructure.
Three commercially operating facilities as of mid-2026: BHDT Hainan (AI inference, South China Sea), HiCloud Hailanyun (Shanghai, 24 MW, offshore wind), and Subsea Cloud’s Jules Verne (Port Angeles, WA, 1 MW). South Korea, Japan, and Singapore have announced plans; none are yet operational. Engineering is splitting into two approaches: sealed-hull passive cooling (BHDT, Natick) versus pressure-equalised dielectric immersion (Subsea Cloud). Neither has dominated yet.
For most organisations, underwater data centres aren’t a near-term vendor option. On a 3 to 5-year planning horizon, the question is which vendors in your region might offer this, and what compliance and entity-list considerations attach. For alternatives at the other end of the physical spectrum, Axiom Space’s orbital data centre nodes are worth understanding. The alternative data centre landscape is moving from research into commercial operation faster than most planning cycles account for.
FAQs
What exactly is an underwater data centre?
A sealed or pressure-equalised computing vessel on the seabed, using ambient seawater as the primary cooling medium — no mechanical chillers, no active cooling loops. Operational examples: BHDT Hainan (35m, South China Sea, since 2023) and Subsea Cloud Jules Verne (9m, Port Angeles WA, since 2023).
Why do China’s data centre economics make underwater deployment viable when Microsoft’s did not?
China’s AI compute demand is growing at roughly 43% per year, with $70B+ in infrastructure investment in 2026 alone and an 80% renewable energy mandate that makes alternative cooling economically necessary. State-backed permitting removes the regulatory timeline that blocked Microsoft. Same technology; completely different demand and policy context.
Why is PUE 1.07 considered exceptional?
Industry average is around 1.58; hyperscalers reach 1.1 to 1.2. At 1.07, only 7% of power goes to overhead versus 50% at 1.5. The gap to 1.2 is roughly 11% lower energy cost per compute unit — material at AI inference scale.
What workloads is China’s Hainan underwater data centre running?
Production AI inference workloads — processing 7,000 queries per second. Commercial, not experimental.
How did Microsoft Project Natick perform before being discontinued?
Phase 2 (Orkney, 2018–2020): 864 servers, 25 months, PUE 1.07. Server failure rate 0.7% underwater versus 5.9% on land — roughly a 6x reliability improvement. Microsoft confirmed the results were technically successful before discontinuing.
Can the servers inside an underwater data centre pod be upgraded or replaced?
Not in-place. The pod must be surfaced to add, replace, or upgrade hardware. BHDT adds new pods rather than upgrading existing ones — a workaround, not a fix. Pressure-equalised designs have different access characteristics but their own servicing constraints.
What is BHDT’s US entity list status and what does it mean for your business?
BHDT is on the US Commerce Department Entity List. US-based firms and those subject to US export controls face restrictions on exporting items, software, and technology to listed entities. If that’s you, any BHDT engagement needs legal review first.
How does China’s approach to underwater data centres differ from Subsea Cloud’s Jules Verne pod?
BHDT: sealed pressure vessel, passive hull-conduction cooling, nitrogen atmosphere, 35m depth, South China Sea, multi-module at 400–500 servers per cabin. Jules Verne: pressure-equalised chamber, dielectric immersion cooling, 9m depth, Port Angeles WA, 16 racks, ~800 servers, 1 MW. Two distinct engineering philosophies.
Are underwater data centres better for the environment than land-based ones?
On energy: yes — up to 40% less energy consumption than traditional data centres, no freshwater use, lower emissions paired with renewables. On marine impact: genuinely uncertain — limited impacts at small scales, cumulative effects at large deployment scale unestablished. No standardised EIA framework as of 2026.
What regulatory approvals are required to deploy an underwater data centre?
Seabed permitting, marine construction permits, EIA requirements, and ongoing maritime compliance — no standardised global EIA framework as of 2026. China’s Hainan Free Trade Port framework lets state-adjacent operators move fast. Western commercial operators face a multi-year process with no clear template.
What countries are planning underwater data centres after China?
South Korea, Japan, and Singapore have announced plans; none operational yet. The US has Jules Verne (Port Angeles, since 2023). Europe had Project Natick Phase 2 in Orkney — no commercial successor announced.
