Texas orders data centers to pay for grid upgrades

Governor Greg Abbott directed the Public Utility Commission of Texas and ERCOT to require new data-center projects to fund the electric infrastructure needed to serve them. He ordered the two agencies to deliver a joint memo by July 17 and to begin lowering residential transmission charges by the end of July. He also asked regulators to consider water-efficient cooling, mandatory annual reporting on power and water use, and whether the state’s sales tax exemption for data center equipment should continue.

The directive instructs regulators to require developers to cover the costs of substations, transmission upgrades and interconnection work that have often been spread across all ratepayers. Abbott cited the goal of preventing residential customers from bearing the costs of rapid growth in large electricity users. He referenced a 2025 law that requires very large loads to bring backup power and to curtail during grid emergencies.

Texas has pursued data-center investment with low electricity prices, available land and a sales tax exemption on qualifying servers, cooling systems and related equipment. The state comptroller estimates the exemption will cost about $3.2 billion in forgone revenue over the next two years, including roughly $1.3 billion this year. One hundred twenty-one facilities currently use the exemption and about 6.5 gigawatts of data-center capacity are under construction in Texas.

Grid demand has risen rapidly. ERCOT set an all-time peak of 85,508 megawatts in August 2023. Its preliminary long-term forecast shows a high-demand scenario with peak demand as much as 367,790 megawatts by 2032. A conservative forecast rises from roughly 98,000 megawatts in 2026 to about 111,000 megawatts by 2032 before counting large new loads. The interconnection queue grew by about 270% in 2025 to roughly 226 gigawatts, with about 73% of that new demand coming from data centers.

If regulators implement Abbott’s direction, developers should expect higher upfront capital costs because they would finance grid connections. That change increases the appeal of on-site power options such as behind-the-meter generation, co-located gas or solar plants and large battery storage, which can reduce the amount a campus draws from the grid or provide firm capacity. One example in development is Project Matador near Amarillo, which is financing a private power grid so the campus brings new generation onto the system as it draws from it.

Regulators are also likely to consider stricter water-use rules and annual reporting requirements. The long-running state sales tax exemption is slated for review in the 2027 legislative session. Projects with signed interconnection agreements are largely protected by contract, so the most immediate effects will fall on new builds and major expansions.

Different types of compute demand have different impacts on the grid. Bitcoin miners can reduce consumption quickly and have been integrated into controllable-load programs; that flexibility can make them easier to manage during tight conditions. AI training and inference workloads generally require continuous, firm power and are less able to respond to price or reliability signals, increasing demand for dedicated infrastructure and firm electricity supplies.

Local opposition has grown in some Texas communities. The San Marcos City Council recently rejected a proposed $1.5 billion data center after extended public comment. A national poll found a majority of respondents would oppose an AI data center in their own community. Regulators and officials in other states facing rapid data-center growth are expected to watch how Texas implements these directives.