Key Takeaways

  • Texas Governor Greg Abbott (R) has requested an audit of all data centers in the ERCOT interconnection queue, applying the brakes to data center development amid rising electricity demand.
  • The interconnection queue totals approximately 474 gigawatts, which Abbott said in a letter to the grid operator and state regulators is "more than five times ERCOT's record peak electricity demand," and "about 90% of new electricity requests come from data centers."
  • ERCOT has postponed the Batch Zero transmission planning study, which will cover the first projects applying under the new large-load interconnection process. Attorneys at Troutman Pepper Locke noted that generation and data center developers should reassess project timelines and consider whether the suspension affects project viability.

Deep Dive

In his letter, Abbott said the scale of data center development in Texas "could jeopardize the reliability and stability of the Texas electric grid." The letter also outlined what the audit of data center proposals will review:

  • The extent to which data centers "self-generate power or rely on the ERCOT grid for power." Questions include expected annual and peak electricity usage, "as well as any efforts and progress toward building or procuring on-site generation."
  • Whether data centers bring their own water supply and recycle water, "rather than using water resources needed by local communities." The audit should ask about expected annual and peak water usage and the anticipated source of water supply.
  • Analyze "which data centers pay their own way and which rely on state financial assistance," including state and local tax incentives, grants, abatements, or other public financial aid.

Abbott said: "Any data center project that fails the verification and audit process to protect the reliability and resilience of the Texas grid must be rejected."

Texas's moratorium follows New York, which in July paused new data center approvals for one year to develop new rules.

In response to Abbott's letter, ERCOT issued a market notice on Monday postponing the Batch Zero process and plans to request a good cause exemption from the schedule at a public meeting with the Public Utility Commission of Texas (PUCT) on August 20.

The Data Center Coalition, representing the data center industry, said it hopes Abbott's audit "will help distinguish responsible stewards of water and energy from those who are not." Dan Diorio, executive vice president of state policy and government affairs for the trade association, said in an emailed statement: "Given billions of dollars in investment and hundreds of thousands of jobs at stake, we urge PUCT and ERCOT to act swiftly to differentiate speculative projects from serious, committed investors and community partners."

Preliminary forecasts released by ERCOT in May show peak demand could grow more than fourfold by 2032, driven by data centers and other large-load customers—but the grid operator also warned the forecast could be overstated. Utilities and grid operators have been struggling to assess data center load forecasts inflated by speculative projects.

The law firm Troutman Pepper Locke published a blog post on the Texas moratorium, calling it an "indefinite delay" and urging project stakeholders to carefully evaluate the situation. The firm said: "Generation and infrastructure investors investing in transmission, generation, or grid infrastructure associated with large-load projects should assess the impact of this suspension on project viability, lender security interests, and committed capital deployment timelines—including counterparty termination rights." Technology companies and hyperscalers considering projects in Texas "should evaluate development timelines and assess new disclosure and compliance requirements that will govern any future interconnection approvals."

Virginia is the number one state for data center development in the U.S., with Texas in second place. Conventional wisdom holds that the Lone Star State will surpass Virginia. Data center developers say they believe this can still happen. Diorio said that if handled properly, Abbott's audit "can showcase the good actors in the data center industry rather than unnecessarily delay them, ensuring Texas remains a national leader in economic development."