Texas tells data centers to pay for grid upgrades

On June 10, Governor Greg Abbott directed the Texas Public Utility Commission and grid operator ERCOT to require data centers to fund the electric infrastructure built to serve them. Regulators were told to produce a joint memo by July 17 outlining actions they can take now and what will require new legislation in 2027, and to begin lowering residential transmission costs by the end of July. The governor also asked agencies to adopt water-efficient cooling, require annual reporting on power and water use, and reassess a long-running sales tax exemption for qualifying data center projects.

Texas has about 6.5 gigawatts of data center capacity under construction, roughly one-fifth of the national pipeline. The state currently lists 121 facilities claiming a sales tax exemption that waives the 6.25% tax on servers, cooling equipment and other items. The state comptroller estimates the exemption will cost about $3.2 billion in forgone revenue over the next two years, including about $1.3 billion this year.

The directive cites rising demand on the grid. ERCOT set an all-time peak of 85,508 megawatts in August 2023. Its preliminary long-term forecast shows scenarios with peak demand as high as 367,790 megawatts by 2032; a more conservative view projects growth from about 98,000 megawatts in 2026 to roughly 111,000 by 2032 before many planned large loads are added. The interconnection queue expanded sharply in 2025, with large-load requests climbing to roughly 226 gigawatts late in the year; data centers accounted for about 73% of that demand. The governor referenced the 2025 law that requires large loads to bring backup power and to curtail during grid emergencies as an existing policy change.

Requiring developers to cover the upfront costs of substations, transmission upgrades and interconnection work will raise the capital needed to begin projects. That requirement is likely to push more operators toward behind-the-meter generation, co-located gas or solar plants, and large batteries. One campus under development is funding a private power grid so it can add generation while drawing from it. Existing signed interconnection agreements remain contractual, so the most immediate effects will fall on new builds and major expansions.

The governor’s order also seeks tighter rules on water use and transparency. Regulators were asked to design mandatory annual reporting for electricity and water consumption and to tighten water-efficiency requirements for cooling systems. Abbott requested lawmakers review the state sales tax exemption when the Legislature meets in 2027.

Industry reaction has been mixed. Some developers and lenders favor clear, upfront rules because they provide certainty for financing and local permitting; higher initial capital requirements change project economics. Bitcoin miners, which can curtail demand quickly, have been integrated into ERCOT’s controllable load programs and have been treated as flexible resources. One estimate credited that approach with reducing the need for new gas peaker plants after 2021 grid outages. Miners that seek new interconnections will face the same obligation to fund infrastructure and will compete with AI and cloud operators for firm power.

Local resistance to large data center projects has increased. The San Marcos City Council rejected a proposed $1.5 billion data center after extended public comment. Other data center hubs, including Northern Virginia, Georgia and Arizona, are addressing similar transmission and community concerns. Texas’ regulatory actions are expected to be watched by other states considering how to allocate costs for large new electric loads.